On Friday, stocks closed at their highest levels since late 2007.
Meanwhile, earnings growth expectations continue to come down.
“Since the end of the fourth quarter (December 31), analysts have also reduced earnings growth expectations for Q1 2013 (to 0.5% from 2.4%) and Q2 2013 (to 5.4% from 6.7%),” wrote FactSet’s John Butters on Friday.
Earnings are arguably the most important driver of stocks. So, when stocks go up and earnings expectations come down, valuations are going up. In other words, stocks are getting more expensive. Technically speaking, multiples are expanding.
This is something we’ve written about before expansion.
And for the bearish market watchers who have been pointing to falling earnings as a reason to get out of stocks, this ongoing multiples expansion is a true test of patience.
Here’s a chart from FactSet showing stocks (green) trending up, while earnings (blue) trend down:
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