- The stock market is poised for a correction, with stock valuations reaching historically high levels, according to economist David Rosenberg.
- Rosenberg emphasized that the S&P 500’s 26% surge over the past year has been fueled by just 6% growth in profits.
- “This is a giant bubble, surpassed only by the tech frenzy of 1999-2000,” Rosenberg said.
Economist David Rosenberg says the stock market is “poised for a correction” as earnings valuations reach historically high levels.
In a series of notes over the past two days, Rosenberg warned that the S&P 500’s 26% gain over the past year is losing momentum, with earnings growing just 6% over the same period.
This suggests that the S&P 500’s forward price-to-earnings ratio, which has risen to 21 times from 18 times in October, is expanding.
“Only 5% of moves like this have happened in a seven-month period over the past 30 years,” Rosenberg said. “Everyone is saying this is an earnings-driven stock market, but the past year has actually seen four times price-to-earnings growth and one time EPS growth.”
Future earnings forecasts also don’t look good, Rosenberg said: Wall Street consensus is for S&P 500 earnings of $245 a share in 2024, the same as forecasts in October, before the stock market rose nearly 30%.
“Not only that, but 2025 earnings estimates (currently $275) have increased by less than 2% since the market surged last October!” Rosenberg said.
The surge in equity valuations has caused the equity risk premium to plummet, leaving the S&P 500’s earnings yield at 4.8%, just above the 10-year Treasury yield of about 4.5%.
“In other words, the equity risk premium has disappeared. The stock market is overvalued and, given interest rates, price-to-earnings multiples are more than 30% higher than historically,” Rosenberg said.
This plays into Rosenberg’s consistently bearish view, but he also said that high valuations in and of themselves don’t mean the stock market can’t rise further.
“This doesn’t suggest that the bubble can’t get any bigger, but it does suggest that this is the biggest bubble after the tech boom of 1999-2000,” Rosenberg said.
