Bull Market on Borrowed Time: Wall Street’s Rally May Crash if Earnings Miss
Wall Street’s recent rally has been driven by a mix of factors, but experts warn that this momentum may soon come to an end. The absence of fear has powered the bull market, with investors pricing in a soft landing before it’s fully earned.
The Disconnect Between Market Performance and Fundamentals
Michael Kantrowitz, chief investment strategist at Piper Sandler, notes that the market’s climb over 8% in the past year can be attributed to falling inflation, rate-cut hopes, and fading recession fears. However, he argues that there haven’t necessarily been signals of stronger fundamentals driving this growth.
Kantrowitz points out that companies experience international supply chain pressures differently, with some high-flying names seeing effortless growth while others struggle. He advises against using the market as an indicator of whether risks like tariffs are being priced in. "The market may not be appearing to pay much respect to tariff risks," he said, even though negative surprises can arise from Trump’s tariff deals.
Tariffs and Their Impact on Corporate Earnings
Tariffs appear to be having a significant impact on some companies. Procter & Gamble (PG) and Whirlpool (WHR) recently reported earnings that underscored the repercussions they face due to Trump’s trade policy. Kantrowitz notes that these companies experience international supply chain pressures differently, but warns that investors may not fully understand the risks associated with tariffs.
The path higher has been greased by unusually favorable financial conditions. Bond volatility is sitting at multiyear lows, real energy prices remain tame, and credit spreads have tightened to multidecade lows. These factors may help explain why valuations are stretched and why they make the current moment more fragile, especially if interest rate expectations shift.
Valuation Concerns
Kantrowitz notes that valuations of the S&P 500 should be high relative to history. He also points out that credit spreads suggest that further P/E expansion is limited. "How much more PE expansion is possible?" he asked, noting that this will come down to the next several inflation reports and where interest rates go.
Risks to the Market
The risks are that the market is currently pricing in too many rate cuts, and that sticky inflation or geopolitical shocks, like trade wars, force a repricing. If that happens, investors may "sell off" the most speculative names. Kantrowitz also warns that if earnings don’t catch up to the optimism, Wall Street will be forced to reckon with results that don’t support the hype.
Near-Term and Long-Term Concerns
In the near term, attention will remain on corporate guidance. Any sign of softening demand, margin pressure, or cost inflation could cause swift revaluations. But over the longer term, the market’s fate may hinge on whether earnings actually catch up to the optimism or if Wall Street will be forced to reckon with results that don’t support the hype.
Conclusion
The disconnect between market performance and fundamentals is a concern for investors. While the market has been driven by a mix of factors, including falling inflation and rate-cut hopes, experts warn that this momentum may soon come to an end. The absence of fear has powered the bull market, but Kantrowitz notes that companies experience international supply chain pressures differently. Tariffs appear to be having a significant impact on some companies, and investors may not fully understand the risks associated with tariffs. The path higher has been greased by unusually favorable financial conditions, but valuations are stretched, and interest rate expectations will play a crucial role in determining the market’s fate.
