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Why the stock market is way overvalued

A trader works on the floor of the New York Stock Exchange.
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A trader works on the floor of the New York Stock Exchange.

Interesting note from Nomura this morning saying the market is currently pricing in 9.6 percent earnings growth in the S&P 500, well above the long-term realized average of 7 percent (since 1945) and much higher than analysts' expectations of mostly flat earnings growth this year.

What's it mean? Optimistic earnings growth + economic uncertainty = downside risk for markets. That simple.

Now, the market is acting like this earnings recession is a temporary phenomenon.

Maybe. But Nomura notes that the divergence between stock prices and earnings expectations is usually closed by the market dramatically trimming its expectations of long-term earnings growth—but that means lower prices.

They think the S&P 500 could drop 11 percent to 1850, which would get it back to its historic norm of 7 percent earnings growth. Still higher than what the Street is expecting!

  • Bob Pisani

    A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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