The most important pillar of the bull market is starting to crumble

Well, it was a fun ride while it lasted.

Red-hot corporate earnings growth — historically the biggest contributor to share-price appreciation — has nowhere to go but down, says Strategas Research Partners.

This is significant because any sort of slowdown would deprive the market of it’s most crucial driver — one that’s helped keep the stock market afloat amid middling economic data and elevated geopolitical risk.

A big part of Strategas’ argument stems from the fact that the period against which current earnings are compared — the first half of 2016 — was notably weak. And that, in turn, pushed year-over-year growth to unsustainable levels.

As the chart below shows, Wall Street is not bracing for the decline. Its estimates are represented by the blue columns, which show continued profit expansion over the next two quarters. Strategas has other ideas. Adjusting for historical factors, the firm sees earnings growth declining over the period before being cut almost in half by the first quarter of 2018, as indicated by the red columns.

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Strategas is bucking Wall Street estimates and forecasting a decline in earnings growth over the next two quarters. Strategas Research Partners

“Last year’s easy comps become this year’s tougher comps starting now, so the natural progression is for the growth rate to slow,” Nicholas Bohnsack, the president and head of quantitative research at Strategas, wrote in a client note. “Adjusting prevailing estimates for the historical revision baseline, which is negative, shows earnings growth falling to mid-single digits rates by next year.”

“This is not to say earnings will begin to decline straightaway, but they will mathematically increase at a decreasing rate,” he continued. “This progression is typical of a late-cycle profit re-acceleration running out of steam.”

Strategas is also keeping an eye on revenue growth, as well as how gross domestic product is faring. According to the firm, the two metrics “look toppy,” suggesting that a downturn may be imminent. As seen in the chart below, both have pulled back slightly in recent months.

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Sales growth and GDP look ‘toppy,’ says Strategas. Strategas Research Partners

That’s not to say this expected slowdown is negatively affecting investor sentiment — at least not yet. Hedge funds are large speculators are the most bullish on the S&P 500 since early May, according to data compiled by the Commodity Futures Trading Commission. Further, Wall Street strategists forecast that the benchmark index will climb another 2.4% by year-end from Thursday’s closing level.