Can We Trust Mr. Market’s Booming Economic Outlook?

Fiscal spending is mostly non-productive. It boosts economic activity for a short period. However, and this is important, it also:

  • Pulls growth forward from the future resulting in less future demand
  • Further increases the amount of debt that must get serviced, resulting in less money available for consumption or investment.
  • Worsens productivity growth rates, again further dampening future economic growth

Barring an unexpected burst of productivity, inflation, or maybe even Martians landing on earth and buying our goods, we find it nearly impossible to forecast longer-term economic growth matching the historically paltry 2.25% rate of the 2010s.

How Much Economic Growth Is The Market Predicting?

Given the link between corporate earnings and economic growth, we can use stock prices and earnings estimates before COVID arrives at an implied economic growth rate.

To help with this task, we share Lance Robert’s article- Is The Narrative All “Priced In?”

The article compares one-year forward earnings expectations from December 2019 to the current estimate for year-end 2021. As he wrote, However, earnings for 2020 will not come in at $167/share, but rather closer to $93/share. Such is more than $74 lower than estimated, leaving investors holding assets that have doubled in valuation from 19x to 38x earnings.” He then explained analysts expect earnings to be $143.09 per share at the end of 2021.

Economic, Can We Trust Mr. Market’s Booming Economic Outlook?

S&P 500 earnings per share from 2012 through 2019 grew at a six percent annualized rate. Had they continued at that rate in 2020 and through 2025, earnings would increase to $199 per share.

Current EPS estimates for December 2021, implies that earnings will grow 30% next year.

Let’s assume the market is right for 2021, even though forward earnings tend to decline as the year progresses. We can then solve a growth rate that brings EPS back to where a 6% growth rate would have put earnings in 2025 ($199). With these assumptions, math implies a growth rate of 8.5% for the years 2022-2025, as shown below.

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