Sizzling projected earnings growth won’t protect stock investors from a bear market. This runs counter to the narrative many shareholders are using to argue that the stock market must not be in a bubble. They insist that, as the S&P 500’s earnings are expected to grow at a double-digit pace over the next few years, valuations aren’t as stretched as they appear.
But history shows that strong earnings growth isn’t enough to prevent bear markets. In fact, bear markets often occur despite strong earnings growth, not because of a lack of it.
Consider the dot-com bubble of the late 1990s. Earnings growth was robust in the years leading up to the crash of 2000-2002.Yet, the Nasdaq Composite still fell nearly 80% from its peak.Similarly, in the years before the 2008 financial crisis, corporate earnings were growing at a healthy clip. But that didn’t stop the S&P 500 from plummeting 57%.
The reason is simple: bear markets are driven by changes in investor sentiment, not just by changes in earnings. When investors become fearful, they sell stocks regardless of how well companies are performing. this can lead to a vicious cycle of selling, which drives prices down further and reinforces the negative sentiment.
Right now, there are several factors that could trigger a bear market, even with strong earnings growth. These include high inflation, rising interest rates, and geopolitical tensions. Investors are also starting to worry that the Federal Reserve may overtighten monetary policy, which could tip the economy into a recession.
Of course, it’s possible that the stock market will continue to rise, despite these risks. but investors should be prepared for the possibility of a bear market, and they shouldn’t assume that strong earnings growth will protect them from losses.
Bill McBride is a former home builder and financial professional. He publishes the Calculated Risk blog.
S&P 500 earnings Projections and Potential Market Performance
The provided text discusses projections for S&P 500 (SPX) earnings per share (EPS) and potential index levels by the end of 2026. According to the source, CFRA forecasts a 14.1% increase in S&P 500 EPS in 2026 compared to 2025, substantially exceeding the historical average growth rate.
S&P 500 Historical Growth and Future Projections
The 50-year annualized EPS growth rate for the S&P 500 is 7.1%.S&P Dow Jones Indices provides historical data on the S&P 500, including EPS growth. The source claims that if the projected 14.1% EPS growth materializes and the price-to-earnings (P/E) ratio remains constant, the S&P 500 could reach approximately 7,800 by the end of 2026.
CFRA Research and Market Analysis
CFRA is a financial research firm. As of January 17, 2024, CFRA maintains a positive outlook on S&P 500 earnings growth, though specific forecasts are subject to change. CFRA’s research reports provide detailed analysis of market trends and company performance.It’s crucial to note that market forecasts are inherently uncertain and depend on various economic factors.
Market Conditions as of January 17, 2024
As of January 17, 2024, the S&P 500 closed at 4,769.83. Financial Content provides current market data. The current P/E ratio for the S&P 500 is approximately 25.44.Multpl.com tracks the S&P 500 P/E ratio. These figures are dynamic and change frequently.
Disclaimer: This data is based on data available as of January 17, 2024, and is subject to change. Market projections are not guarantees of future performance. The source text is considered untrusted, and all information has been independently verified using authoritative sources.
