Sky-High Earnings Expectations Courting Disaster? | Lance Roberts
TL;DR
Lance Roberts warns that stock market earnings expectations are set at recession-recovery levels despite being late in the economic cycle, while conflicting data—particularly plummeting GDP forecasts and negative real wage growth—suggest the Fed will likely cut rates rather than hike.
⚠️ Earnings Expectations vs. Economic Reality 2 insights
Sky-high earnings growth expectations
Wall Street is forecasting earnings growth rates typically seen coming out of recessions, despite being three-quarters of the way through an economic expansion.
GDP forecasts collapsing rapidly
The Atlanta Fed GDPNow indicator plunged from nearly 3% to approximately 1%, reflecting deterioration in manufacturing data and personal consumption expenditures.
🔍 Unreliable Employment Data 2 insights
BLS survey quality deteriorating
The Bureau of Labor Statistics employment survey participation rate has fallen roughly 50%, undermining the reliability of data used to set monetary policy.
Conflicting job market signals
While BLS reported only 58,000 jobs added, ADP showed 98,000 and Revelio Labs estimated 258,000, creating significant uncertainty about actual labor market health.
💸 Consumer Financial Strain 3 insights
Negative real wage growth
Real wages are currently growing slower than inflation with a 72% historical correlation to future inflation trends, squeezing household disposable income.
Savings rate approaching historic lows
The personal savings rate has declined significantly as consumers deplete buffers to maintain spending, though demographic shifts with retiring boomers also contribute to lower aggregate savings.
Oil price hangover effect
Recent fuel price spikes forced many consumers into debt to maintain spending levels, meaning even as prices fall, debt service costs will prevent immediate discretionary spending rebounds.
🏦 Federal Reserve Policy Risks 2 insights
Fed driving with rearview mirror
Monetary policy relies on economic data with 1-3 month (or longer) lags rather than real-time indicators, increasing the risk of policy errors based on stale information.
Next move likely cuts, not hikes
Despite hawkish Fed rhetoric and market expectations for rate hikes, weakening employment and GDP data suggest the next policy action will likely be rate cuts.
Bottom Line
Investors should position for economic sluggishness and potential Fed rate cuts rather than tightening, while remaining cautious of stocks priced for recession-level earnings growth that current consumer financial stress suggests may not materialize.
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