Why the US equity market rally is likely to run out of steam

The rally in the US equity market is nine months old and still going strong. This is not surprising. Equity prices typically start to rise six months or so before the economy emerges from recession. They also tend to go on climbing during the early stages of the economic recovery, which we think started in June. Eventually, though, rallies run out of steam. With the price/trend earnings ratio of the S&P 500 now about a third higher than its long-run average of below 15, we think the index will peak around 1150 in the spring before falling back to end next year around 1000.