Why One Bank Is Warning Its Clients Of An Imminent "Hard Correction" | WHAT REALLY HAPPENED

Why One Bank Is Warning Its Clients Of An Imminent "Hard Correction"

Earlier this week, when recapping the latest bearish outlooks from most large Wall Street banks, we touched on Deutsche Bank's latest House View take in which the bank - along with most of its peers - said that its strategists expects an "imminent correction" without giving much context for the bank's gloomy take.

So fast forwarding to today, the bank's chief equity strategist Binky Chadha expounded on this bearish take, and in a note pointing out that "equity valuations are extremely rich", he first explains "what's keeping equity valuations high", and then goes on to warn that "the risk the correction is hard is growing" adding that "there has been a clear negative relationship between initial valuations and subsequent forward returns, with the relationship strengthening as the return horizon is increased from 1 to 3 to 5 years out. For the highest decile of initial valuations, which is where we currently are, 5-year forward returns have on average been slightly negative."

Starting at the top, Chadha lays out what everyone - even the NY Fed president - is aware of, namely that equity market valuations are "historically extreme" on almost any metric: "trailing and forward price to earnings (P/E), enterprise value to EBIT, EBITDA or operating cash flow are all well into the 90s in percentile terms. High valuations are broad based across sectors and median company valuations are high."