Unleashing the Bull Market: Why Analysts Have Underestimated Equities
In a recent note, Alpine Macro strategists revealed that analysts have consistently underestimated the current bull market. Despite doubts and skepticism, the global investment firm believes that equities are on track to exceed expectations, driven by expanding earnings growth and a resilient economy.
As we reach the midpoint of the year, the market is trading above the top price targets set by Wall Street strategists for 2024. This bullish trend highlights a significant gap between market performance and analyst forecasts, with predictions falling short of actual price levels. Investors have also been underexposed to equities during this rally, reflecting a widespread miscalculation.
Alpine Macro attributes this misunderstanding to several factors. Firstly, the anticipated recession has failed to materialize, instead manifesting as a profit recession in specific sectors. Mega tech companies have emerged as a powerful force, less susceptible to macroeconomic factors, driving the overall large-cap U.S. equity index forward.
Corporate earnings have outpaced expectations, fueled by secular tailwinds in the tech sector. Companies demonstrating exceptional quality, profitability, and growth are leading the market, immune to traditional business cycles and interest rate policies.
The current bull market is further bolstered by broadening earnings growth, with sectors recovering from rolling recessions experiencing stable revenues and expanding profit margins. Historical data suggests that profit margins rebound quickly after major downturns, indicating further potential upside.
Alpine Macro's earnings model projects robust growth, with estimates pointing towards a positive outlook for the year. A bullish thesis for equities includes a potential valuation catch-up for the broader market, aligning it with high valuations of Mega Cap leaders.
Their fair-value valuation model suggests a price-to-earnings (P/E) multiple of 20x, implying a price level of 5,200 for the index. However, applying this multiple to the rest of the market while maintaining Mega Tech valuations would result in a price level of 5,700.
In conclusion, the trajectory of earnings growth and market dynamics support a bullish outlook for equities. By understanding the factors driving the current bull market, investors can position themselves to capitalize on the ongoing expansion and potential valuation catch-up.