Here’s a metric we’ve been following with interest for the last several weeks.
It’s earnings growth expectations, which have been falling on a weekly basis.
Earnings and earnings expectations are arguably the most important drivers of the stock market.
“Since the end of the fourth quarter (December 31), analysts have also reduced earnings growth expectations for Q1 2013 (to 0.1% from 2.4%) and Q2 2013 (to 5.1% from 6.7%),” wrote FactSet’s John Butters in a note published on Friday. “For Q1 2013, all 10 sectors have witnessed a decline in estimated earnings growth, led by the Materials (to 2.1% from 7.2%) and Information Technology (to -2.7% from 1.7%) sectors.”
Just last week, the growth expectations 0.5% for Q1 and 5.4% for Q2.
Meanwhile, the S&P 500 ended last week at a fresh post-crisis high.
When stocks go up while earnings come down, valuations are rising in a phenomenon called multiples expansion. In other words, stocks are getting more expensive.
Some stock market bulls argue that valuations should justifiably be higher.
But the bears will warn that eventually, these cracks in earnings expectations will catch up to the market and manifest in a sell-off.
Here’s the chart from Factset:
Here’s a chart from Goldman Sachs showing how full-year earnings growth expectations have been coming down:
Photo: Goldman Sachs