Have Stocks Already Priced In The “Economic Boom?”

“Relative to last year’s second-quarter plunge of nearly -31% year-over-year, expectations are that S&P 500 earnings will be up more than 46% in this year’s first quarter. The second quarter will boast a whopping 60% increase. Such should be the inflection point in terms of the year-over-year growth rate.” – Liz Ann Sonders

Economic Boom, Have Stocks Already Priced In The “Economic Boom?”

The problem is the S&P rose to levels that earnings growth will have difficulty supporting, particularly as the stimulus fades from the system. As with economic growth, the 2nd derivative of earnings growth is now a headwind for the markets.

Economic Boom, Have Stocks Already Priced In The “Economic Boom?”

Such is also the problem of “pulling forward sales.”

 

Conclusion

Notably, the outsized growth of the market reflects repetitive interventions into the financial markets by the Fed. Those interventions detached financial asset growth from their long-term correlation to GDP growth, where corporate revenue comes from. Historically, when the S&P 500 becomes separated from economic growth, a reversion occurred.

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Economic Boom, Have Stocks Already Priced In The “Economic Boom?”

Currently, analysts are expecting earnings to surge well above economic growth rates. However, the flaw in the analysis is the assumption earnings growth will continue its current trend.

While there will be an economic recovery to pre-pandemic levels, a recovery is very different from an expansion.

As Liz concludes:

“Optimism is extremely elevated. Such is certainly justified by stock market behavior over the past year and recent economic releases. But some curbing of enthusiasm may be warranted given the history of the stock market as an uncanny ‘sniffer-outer’ of economic inflection points.”

As she goes on to point out, this is not a time for FOMO-driven investment decision-making. The reality is that the supports that drove the economic recovery will not support an ongoing economic expansion. One is self-sustaining organic growth from productive activity, and the other is not.

The risk of disappointment is high. And so are the costs of being “wilfully blind” to the dangers.

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