Alpine Macro strategists said in a recent report that analysts have consistently underestimated the current bull market. Despite widespread skepticism, the global investment firm believes stock markets will continue to outperform expectations, driven by growing earnings and a resilient economy.
As of the middle of the year, shares are trading above the highest price targets set by Wall Street strategists for 2024. This bullish trend signals a large disconnect between market performance and analysts’ forecasts, with strategists’ targets falling far short of actual price levels on record in recent quarters. Funding flows are reflecting this miscalculation, with investors underexposing shares to this rally.
According to Alpine Macro, a few factors contribute to this bull market misconception: First, the much-anticipated recession has yet to materialize.
“We are seeing a slowdown consistent with tightening financial conditions, but that has translated into a sustained pullback in earnings across some sectors as opposed to a broad-based decline,” the strategists wrote.
Moreover, big technology companies have emerged as a unique group that is immune to macroeconomic forces, helping to lift the overall U.S. large-cap index.
These developments helped corporate earnings accelerate and beat expectations, and the secular tailwinds buoying big tech companies attracted capital from around the world, lifting overall valuations.
The emergence of companies exhibiting record quality, profitability, and measurable growth is a hallmark of the U.S. large-cap stock market. These companies are largely insulated from traditional business cycles and more closely tied to the adoption cycles of ubiquitous technologies.
“Due to its low asset base, it is less vulnerable to interest rate policy,” the company noted.
“We believe it is natural that most elements of Megatech will achieve significant valuation premiums as investors prioritize visible sources of quality growth during a time of extraordinary uncertainty,” he added.
The current bull market is being fueled by expanding earnings growth, and sectors that have weathered a prolonged downturn should enjoy stabilizing earnings and expanding margins going forward.
Historical trends suggest that profit margins recover quickly after major economic troughs and are likely to continue to rise in the future.
“Our company earnings model predicts second-quarter earnings of about $59 and closer to $240 on an annualized basis,” the report said. “Our bottom-up estimates, which aggregate earnings data from each company, predict an even better outlook for the year, closer to $250.”
Alpine Macro strategists said their aggressive bullish thesis on the stock includes the possibility of a “catch-up” move in market-wide valuations, which is consistent with the high valuations enjoyed by mega-cap leaders.
These show the trajectory of the S&P 500 if the rest of the market experiences an expansion similar to the Magnificent 7 after 2023. If this catch-up were to occur, the implied value of the S&P 500 would be closer to 6,500, rather than its current level.
“Of course, this is an unreasonable assumption,” they warn.
A fair valuation model incorporating various fundamental and cross-asset inputs suggests a fair value price-to-earnings (P/E) ratio of 20. If this valuation were applied to the entire index, the price level would be 5,200. However, if this multiple were applied to the rest of the index, while holding MegaTech’s valuation constant, the price level would be 5,700.
“We believe this is a reasonable intermediate target given our expectations for the earnings growth trajectory,” the strategists concluded.
