This note looks at the outlook for share markets.

The key points are as follows:

– Shares and other listed growth assets have hit an air pocket in the last two weeks – with most share markets having experienced falls of around 5 to 7%.

– It is too early to say that the pull back is over, and it’s likely that shares are transitioning from a price to earnings (PE) multiple expansion driven rally (ie where PE ratios rise from depressed to more normal levels) to one which is more dependent on earnings growth. This could lead to more constrained returns going forward.

– However, we doubt that the cyclical recovery in shares that commenced in March is over. In fact, it would be very unusual for a cyclical recovery in shares to end when leading economic indicators are still rising, earnings are still recovering from depressed levels, interest rates are so low and so many investors are still sitting in cash as is all the case right now. As such, our assessment is that it is still early days in the cyclical bull market. The typical post war cyclical bull market in Australian shares has seen average gains of 132% spread over four years.

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