How Stock Bubbles Die

Expectations Are Sky High

Earnings estimates are very high. This is looking like the tech bubble in the late 1990s. As you can see from the chart below, the bottom-up consensus long-term earnings growth rate expectation is 16% which obviously can’t be sustained.

Earnings growth estimates will fall back down to the low double digits in the next few quarters which should hurt stocks. The biggest criticism of the forward PE multiple was that we were coming out of a recession which meant earnings estimates were too low. However, we are beyond that. Estimates have come up significantly. The numbers might be able to be studied at face value. The stock market is simply expensive.

Goldman Updates Us On Small Businesses

Goldman Sachs updated us on the state of small businesses. They are still in fragile shape even though they are quickly becoming healthier. Specifically, Goldman Sachs’ survey showed 77% of small business owners expect to exhaust their second round of PPP loans by the end of June. You would think that might be okay because the pandemic should largely be over by then in the US. However, the survey also showed only 26% of small businesses getting help expect to be able to maintain payroll without additional help.

It’s possible small businesses are too pessimistic. At the same time, you have to wonder how they can’t see the pandemic ending. Most should be aware the death rate has fallen sharply and the vaccination process is going well. There will be a certain point where if a business can’t do well, it shouldn’t exist anymore. One other possibility is small businesses are just saying they won’t be able to make payroll just to get the government to give them more loans. These are all potential answers since this weak reading is being paired with a boom in economic activity. Even the worst-hit areas of the economy in 2020 are doing well.

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Disclaimer: The content in this article is for general informational and entertainment purposes only and should not be construed as financial advice. You agree that any decision you make will be ...

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