The PE ratio of the S&P 500 is now around 23.7, down from a P/E of around 28 just a few weeks ago, which is the highest (most expensive) in at least 150 years of this chart (via worldperatio.com). To buy at these levels is to assume that earnings will soar to reduce that ratio.
Is that realistic in the current environment?
Anyone who thought the markets were very overvalued at the top in mid-February would probably say they are overvalued again now as stock valuations recently returned to those highs.
Those highs will be exceeded on a further rally, which makes the market very vulnerable to a sharp decline sometime over the next 3 months. And one big factor for that decline will be China…
CHINA’S IMPACT: China, the former “locomotive” of the world economies, is now in a depression with an estimated 46.5% unemployment in the prime age group.
China is facing a banking crisis, Perhaps thousands of banks will fail or be “rescued” by government. It has happened before. Failed banks are dumped into a pot called “bad bank,” and investors are “persuaded” to put some money into this “bad bank.”
Now the government of China decided not to publish any important economic statistics. They were always untrustworthy, but they don’t want to even reveal that the economy is not growing, much less that it is in a DEPRESSION (we did a deep dive on China’s Depression in our May 12, 2025 Wellington Letter Special Bulletin).
WSJ reports that whereas, "not long ago, anyone could comb through a wide range of official data from China... then it started to disappear."
One article we saw said that, “even the US Bureau of Labor Statistics is a rank amateur compared to Beijing's National Bureau of Statistics,”
It is very important to realize that China’s problems were not due to the tariffs imposed this year. The source of the huge problem was the COLLAPSE of their Real Estate market and the biggest developers in China, with tens of millions of people losing their life savings and jeopardizing the banking system.
Stock market investors here in the U.S. must think about this to curb their enthusiasm about the recent stock market rally. What happens in 90 days? Lower tariffs are very likely. But low enough to stop the China Depression, which had nothing to do with tariffs? We doubt that.
The big unknown is whether Trump’s polices, as great as they are, can protect the US and EU economies from the historic events inside of China.
However, money managers are talking as if this all doesn’t matter. No, they believe “earnings can soar even if 1.5 billion people in China have no food and no money.” China is a big factor in the sales and earnings of many US stocks. If China is in such a dire economic sate, that will surely have a big impact on US firms.
Remember what we have said many times over the past few months: China is in a DEPRESSION, not just a recession. An article at ZeroHedge said:
“Then, by mid-2023, much of the talk locally revolved around the dismal job market for young people. Many of the students finishing college didn’t have job offers, and viral social-media posts showed them dressed in caps and gowns splayed out motionless on the ground, interpreted by many as a form of silent protest.
Around that time, the official youth unemployment rate hit a record 21.3%. Zhang Dandan, a Peking University economist, made headlines saying she thought China’s true youth unemployment rate might be as high as 46.5%.
Then, as noted above, in August 2023, Beijing announced they would simply stop releasing the youth unemployment rate, saying they "needed to revisit" how they calculated the figures.”
CONCLUSION: Active traders and investors should not only look at short term moves, but consider the longer term environment. China seems to be forgotten in the bull/bear argument in the US. But China is in a Depression.
The bad debt losses in the biggest asset class in the world, China REAL ESTATE, is estimated at over $23 TRILLION. That is bigger than the GDP of all but the top 3 countries in the world. How will the government handle that and the impact on banks?
It is estimated that more than 200 banks have already failed. This is NOT BECAUSE OF THE TARIFFS! However, it is feared that the entire banking system will collapse. Does anyone believe that won’t impact the US and western markets?
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Wishing you successful investing,
Bert Dohmen, Founder
Dohmen Capital Research
Editor, The Wellington Letter
