The stock market has been rocking in April, no doubt about it.
However, that momentum comes with an ugly downside the bulls are forgetting about: possibly unrealistic future earnings expectations that could prove to be a major headwind to further gains.
The problem: New research from Citi shows that the market is pricing in 11.7% compounded earnings growth for the next five years. This level has been matched only a handful of times over the past four decades, Citi strategist Scott Chronert wrote. In turn, the burden of proof is on fundamentals to deliver, as the current bottom-up consensus of 12.6% earnings compound annual growth “leaves little margin for error.”
Wonky, but important: Chronert’s deconstruction of the S&P 500’s (^GSPC) value shows that 41% of current levels are attributable to companies’ base earnings per share, with the remaining 59% tied to future growth, which is elevated relative to historical examples. Specifically, 39% of the index’s value is attributable to future growth in excess of 3%. That is in the 95th percentile over the past 40 years.
“Valuations are extended again after the index rally across a wide spectrum of S&P 500 constituents,” Chronert wrote. “The aggregate implied five-year EPS growth rate presents a significant hurdle. This does not mean that valuations alone provide a sell signal. Rather, it puts a burden on future growth expectations to deliver.”
April and the stock market, on rewind: The S&P 500 has experienced a dramatic run-up in April, rebounding sharply from the late-March lows as the war-risk premium evaporated following a ceasefire in the Middle East. The index has surged more than 9% this month alone, driven by a relief rally that has seen investors rotate aggressively back into growth sectors and large-cap tech names like AI chip darling Nvidia (NVDA).
The upward momentum has pushed the S&P 500’s forward price-to-earnings (PE) ratio to 22.8x, its highest level in over two years and well above its 10-year average of roughly 18x. Investors are now paying a steep premium for future…
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