Let's start with the bull case. At the highest level the FTSE 100 isn't especially expensive by any historic standards - a trailing PE ratio of 13 is pretty much in line with its long-term average and when cyclically adjusted the FTSE All-Share is actually cheaper than the historic norm. Blue chips are still coughing out dividends at a steady pace, too. And although, according to the latest Capita Dividend Monitor, the underlying rate of payout growth has slowed this year, the market's yield of 3.6 per cent is pretty steady and higher than many other markets, and forecast to rise sharply in 2014 as corporates dish out special dividends. On the other side of the pond blowout figures and forecasts from the likes of Apple and Boeing seemingly support the valuation story there.
But for every Apple there has been a Coca-Cola, whose shares plunged after poor figures this week. And being a natural pessimist I'm still drawn toward the bear argument. The FTSE's cheapness is partly explained by the struggles of miners this year - strip those out and its valuation would look higher, like other less mining-centric major markets. The mining sector's plight also reflects a genuine slowing of global growth, something which is filtering through into reduced profit expectations among companies with global exposure. Rolls-Royce's profit warning this week - its second this year - reflects this; with its huge order books and exposure to the secular growth of air travel, Rolls is a company that simply does not do this kind of thing.
I'm not yet, of course, predicting a meltdown on the scale seen in 2008 or the post dot com era - but I can't see much in the way of capital growth either, because I do not believe that, in aggregate, companies will be able to deliver the profits that support their valuations. Indeed, it is just as easy to interpret the level of special dividends as negative for corporate growth prospects - put simply, they don't have anything better to do with the cash than give it back.
That's a problem that has seemingly come to a head this week at IBM. Its shares fell 7 per cent after it slashed 2015 forecast earnings - but are its customers slowing their spending because of its failure to invest rather than economic forces beyond its control? It's spent over $108bn (£67.31bn) on share buybacks since the turn of the century, double its capital expenditure over the period. Such debt-funded financial engineering is something many UK corporates have been guilty of, too. And in trying to create illusory growth, laying a foundation for real growth may have been overlooked.
