Equity market indices to be markedly higher than fundamentals - Natixis

FXStreet notes that equity market indices and economic fundamentals have already decoupled. When the uncertainty subsides, this decoupling will become even more pronounced, which will lead to a tax on buyers of equities, a misallocation of savings and the appearance of bubbles and the risk of a financial crisis if these bubbles burst, per Natixis.  

“The level of uncertainty remains high when it comes to public health (will there be a second wave of the pandemic?), geopolitics (will there be a new wave of US protectionism?) and the economy (how fast will it recover?). Yet we are seeing a clear recovery in equity market indices and the sharp rise in PERs is a clear illustration that indices and fundamentals have decoupled, indices having risen far more than the trajectory of future earnings would imply.”

“When the uncertainty subsides, we should therefore expect equity market indices to be markedly higher than fundamentals. This situation has both microeconomic and macroeconomic consequences: a tax on buyers of equities, since they will buy them at excessive prices, a misallocation of savings, since share prices will no longer give information on the situation of companies and the risk of financial crises, due to the appearance of equity bubbles, then the risk of these bubbles bursting, as we saw in 2000-2001.”