The Bear Camp deserves credit for sticking to their guns, despite being consistently wrong about the economy, earnings, and the stock market. While some bears, like Morgan Stanley’s Mike Wilson, have admitted their errors, many continue to predict a downturn in the market. Their belief is that although sitting in cash during a 30%+ market rally might seem like a missed opportunity, they see it as a temporary gain. However, for those actively investing, being “early” is equivalent to being wrong. The goal is to make profits in real-time, not just predict future outcomes.
The Next Big Worry
The bears are currently sounding the alarm about the consumer’s outlook. They are convinced that the average American household will face hard times, primarily due to inflation. Bloomberg’s Markets Live Pulse survey supports their argument, stating that more than half of the respondents predict a decline in personal consumption, which is a vital driver of US economic growth, in early 2024. Additionally, 21% of the respondents believe the decline will occur sooner due to inflation and its impact on borrowing costs. However, these predictions sound similar to the dire warnings about the economy that emerged in spring 2022 when the Federal Reserve implemented an aggressive rate-hiking campaign. Ultimately, these predictions did not come true, and the economy navigated a soft landing.
Despite the bears’ warnings, many indicators suggest that the average American household is in a strong financial position. Employment numbers are robust, incomes have increased, home values are rising, and savings accounts are healthy. Yet, the bear camp persists in proclaiming that the end is near. Only time will tell if they are right.
The Fly in the Ointment
While I do not possess the predictive power of the bears, I do pay attention to current economic data, specifically earnings. The saying goes, “earnings are the mother’s milk of stock prices,” and historically, rising earnings have corresponded with increasing stock prices. As consensus estimates for S&P 500 earnings reach all-time highs, it is reasonable to expect stock prices to follow suit. The chart from Ned Davis Research clearly shows this upward trend in earnings estimates for each calendar year, particularly in 2023 and 2024.
S&P 500 EPS by Calendar Year
Clearly, earnings estimates are moving in an upward trajectory. Notably, the estimated totals for 2023 and 2024 exceed all previous records, with projections of $220 and $246, respectively. It is crucial to acknowledge that these estimates are subject to change, but the fact that they are higher than previous years suggests potential growth in stock prices. Admittedly, the bears could be right, and the economy might indeed falter, impacting earnings. Only time will tell. However, based on the current outlook, I am cautiously optimistic about earnings and, consequently, stock prices.