The financial markets are signaling a remarkably bullish outlook, with both stock and bond markets fully embracing a “run it hot” trade. However, this aggressive market pricing stands in stark contrast to the pessimistic views held by bottom-up analysts, companies, and economists, according to a recent analysis by Bob Elliott, CIO at Unlimited Funds.
What Happened: Elliott, in a detailed X thread, highlights this unprecedented “divergence” which he has “never seen” in his professional career outside of typical cyclical bottoms.
Following Tuesday’s surge in the equity market, market-based pricing of growth expectations has almost entirely recovered its earlier drop this year, now sitting just a few points off highs.
As highlighted by Elliott, this sentiment is reflected in large-cap 12-month forward price-to-earnings ratios, which are back near all-time highs at 21x.
Concurrently, long-dated real yields have reached their post-COVID cycle highs, and term premiums on closer-in maturities are also approaching their cycle peaks.
Despite this seemingly extreme market optimism, the perspective from professionals analyzing data from the ground up paints a far more subdued picture. Economists are forecasting softer growth for the next couple of years.
Corporate earnings revisions for U.S. large-cap companies have notably collapsed, reaching their weakest point since the COVID-19 pandemic. Global earnings revisions also remain quite subdued, despite a marginal recent uptick in negativity.
Projections for 2025 earnings growth, which are typically skewed positively until just before the period, are currently penciled in at a mere 7%.
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Why It Matters: According to Elliott, either bottom-up analysts, scrutinizing incoming data, are taking an excessively pessimistic stance, or they are accurate, implying the markets are “wildly offside.”
For macro investors, he suggests, “making a call on which is right will likely be the make or break trade for the rest of ’25.”
Price Action: The S&P 500 has turned positive for the year, up 0.90% year-to-date, though it remains 3.67% below its all-time high of 6,147.43.
The Nasdaq 100 is also up for the year by 2.09%, but sits 3.63% off its record of 22,222.61. In contrast, the Dow Jones is still down 0.11% year-to-date and 6.06% from its 52-week high of 45,073.63.
The SPDR S&P 500 ETF Trust SPY and Invesco QQQ Trust ETF QQQ, which track the S&P 500 index and Nasdaq 100 index, respectively, fell in premarket on Wednesday. The SPY was up 0.03% to $591.33, while the QQQ advanced 0.15% to $522.00, according to Benzinga Pro data.
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Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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