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Growth-free profits cast a pall over recovery hopes

Now that the military battle in Iraq is over, my sense is that equity markets want to go up. But I don't believe that this is the start of a new bull market. It is just the eye of the storm of the secular bear market. The bounce will eventually die down and the bear market will reassert itself. We have not seen the lows yet.

The market will ignore valuations for now. These remain stretched. I estimate the S&P500 to be selling on 18 to 19 times this year's earnings. On a multiple of dividends, US equities are absurdly expensive - and dividends count these days. I trust dividend multiples more than P/E ratios because the manifold definitions of profit floating around throw up too many conflicting messages. But the Nasdaq is outperforming the broader indices. That means two things are clear: the market wants to go up and it doesn't give a toss about valuations for now.

Geopolitics will look good for a while too. The US is likely to draw back from military confrontation to test the diplomatic dividend of its victory in Iraq on Syria, Iran and in negotiations with North Korea.

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