P/E expansion has been an important driver of US equity returns in recent years. The left
chart shows the disaggregation of returns in 5 year blocks going back to 1996. As we can
see, in the years 2011-2016, 55% points of the 79% return of the S&P in that period was due to margin expansion (ie over 2/3 of the return came from the P/E), the largest contribution in 20 years. Indeed, for 10 of past 20 years, 2001-2011, margin change contributed a negative return.

Today, there are lofty forecasts for S&P performance due to expectations of a fiscal-driven
reflation trade in the US. However, increases in government spending tend to be associated falling P/E ratios (right chart). With almost of our indicators pointing to weaker corporate profits and profit margins, and our US growth leading indicators not anticipating any major rise in revenues, it is difficult to see what is going to keep equities supported in the medium term.  (Click on image to enlarge.)