The S&P 500 Is Priced for 45% Earnings Growth in 2024!!

S&P 500 earnings need to grow 4 times current expectations to justify valuations

Highlights

• S&P 500 earnings need to grow 4 times current expectations to justify valuations

• A deeper look reveals nothing to worry about in the CPI data

• Equity market divergences are starting to pile up

• What soft landing?

While We Were Sleeping

Yesterday’s action said quite a bit about this stock market rally. First, bonds reacted normally to a CPI number that came in above expectations, but the fact that the major averages ripped just goes to show how momentum- and sentiment-driven and far less fundamentally based the stock market has become. The S&P 500 marked another all-time closing high, rising +1.1%. But on the flip side, the Invesco S&P 500 Equal Weight ETF lagged far behind, edging up +0.3%. As for the Dow, much of that 235-point surge came from three companies — 3M, IBM, and Microsoft (adding a combined 140 points). The Nasdaq Composite jumped +1.5%, but breadth was disappointing again, with decliners having a slight edge over advancers. Small caps watched the action from the sidelines as the Russell 2000 closed fractionally lower on the day.

There is no shortage of yellow flags, including three distribution days for the Nasdaq last week — a development that typically poses some issues for the uptrend. Another one is the fact that two big stock market gainers — Super Micro Computer and Nvidia — are showing signs of topping out. And let’s face it — outside of precious few stocks in the deep-value slice of the market, there simply is not much out there to buy on a GARP (“growth at a reasonable price”) basis any longer. Not to mention that both the Nasdaq and S&P 500 are starting to get really extended once again as they pull further away from the major trendlines.

In the overnight trade, the U.S. major averages have pressed the pause button ahead of the open. Europe, which was one of few regions to see the equity market outlook improve in our just-released Strategizer, is up a moderate +0.2% thus far today. Asia reversed course for the most part: India (-1.0%), China’s Shanghai Composite (-0.4%), and Japan’s Nikkei 225 (-0.3%), while Hong Kong and Taiwan were both little changed. Bonds have managed to retain a bit of a bid, and there wasn’t all that much damage in the aftermath of yesterday’s slightly higher-than- expected core CPI data (more on that below).

The FX market is quiet, with the DXY dollar index unchanged at 102.9. Spot gold also is little changed; Brent crude has eked out a +0.3% advance to $82.19 per barrel and Bitcoin has popped +3.3% in the overnight trade to $73,390. If you have not been involved in Bitcoin but have been long gold, take solace that the latter has one-quarter the volatility, has a much longer track record, and has actually outperformed the crypto space in risk-adjusted terms (Sharpe ratio) over the past three years. All market quotes are time-stamped to 4:30 a.m. (EDT).

The data calendar was light (as it will be all day), with manufacturing output in Japan coming in flat in January. Meanwhile, industrial production in the U.K. contracted -0.2% MoM, though GDP did come in at a better +0.2% MoM but is still modestly shrinking on a three-month basis.

Call it the new math. In fact, when we determine what the normalized forward P/E multiple is when Treasury yields are between 4.0% and 4.5%, it comes out to be 16x, which means that for the S&P 500 to make any sense here from a value standpoint, we would need to see 2024 EPS at $322 instead of the current consensus of ~$242 (or +45% YoY growth compared to the actual +11% consensus right now). This is how far this bubble has gone. The market is basically priced for earnings growth that has only happened 3% of the time in the past — and a pace that generally is saved for an economy shifting out of a recessionary state. In one word or less — crazy.

As for yesterday’s CPI data, let’s not panic just yet. To the second decimal place (+0.36% MoM), it was a “low point-four” on the core index, and the spillover from higher fuel costs to things like airfares, freight costs, and delivery services added +0.1 of a percentage point, so there is your story. Along with motor vehicle insurance premiums which continue to soar, but these are prices the Fed really can’t do anything about unless you choose to raise your deductible. This is more or less a noncyclical mandatory piece of the CPI.

And the number was hardly broadly based — we either had virtually no pricing power or outright declines across medical care goods and services, restaurants & bars, hotels/motels, new vehicles, women’s apparel, personal care goods and services, appliances, furniture, and home improvement. So, let’s not get carried away by the fact that the core index was just fractionally above the consensus estimate — especially since corporate guidance, the Beige Book, and the NFIB small business confidence index have all been retaining their disinflationary thumbprints.

The shelter components of the BLS data are ridiculous and are basically prices nobody pays in real time, and they account for one-third of the index. Not that Statistics Canada is much better, but it is better and when we replaced the weights and flawed methodology in the U.S. with what is done north of the border, guess what? The core CPI would have come in at +0.2% MoM instead of the reported +0.4%. Come on! Even using the U.S. data, we can see that once rents and OER are stripped out, the inflation rate is running below target at +1.8% YoY (light years away from +5.0% a year ago) and the core is at +2.2% (was +3.7% this time last year).

As an aside, given that medical prices were flat in the CPI and are more highly represented in the PCE deflator, undertaking a component-by-component reweighting shows the headline here for the metric nearer and dearer to the Fed’s heart (as well as the core) should end up coming in closer to +0.3% MoM than +0.4%. In fact, there is an outside chance that we could see something nifty like a +0.2% reading on the core deflator when rounding to the second decimal place. It won’t be long until yesterday’s CPI report will be nothing more than a distant memory.

Growing List of Divergences

With U.S. equities recently scaling new record highs, we are continuing to note a growing number of divergences and non-confirmations beneath the surface. The thinking goes that when the major averages hit a new record, a strong market backdrop would see the move ratified across a number of risk-taking indicators. This certainly is not the case of late (see charts below).

For the Dow, there has been a glaring non-confirmation from the Transports (also known as Dow Theory) since last summer — the longer this move is not ratified, the more danger there is at the headline level. But it’s not just Dow Theory.