It may not be 'peak earnings' yet, but investors are getting harder to impress

  • The S&P is trading at just about 17.1 times 2018 earnings, in line with historic norms but well below the 18.5 multiple earlier this year.
  • There's a strong likelihood that buybacks and the impact from tax cuts are not fully priced into the market.
  • Perhaps we will test the markets with surprisingly strong earnings pushing us toward new highs, but the Fed hiking may prevent that.
Andrew Harrer | Bloomberg | Getty Images

The "surgical precision" of the airstrikes in Syria helped greatly relieve market concerns, for the moment, that a wider conflict was brewing.

The bigger debate the market is having is this whole "peak earnings" story, the idea that this year corporate earnings will be up 18 percent to 20 percent. The punchline is that the estimate for 2019 earnings is a gain of 10 percent. Earnings are still growing over both periods, but the rate of growth will be lower next year.

Will that matter? My sense is that it will, but it's too early to have this fight. This seems like a debate for the third quarter, not now, and that the market still has room to go up.

I think stocks still may have room to go up. The S&P is trading at just about 17.1 times 2018 earnings, in line with historic norms but well below the 18.5 multiple earlier this year. And there's a strong likelihood that buybacks and the impact from tax cuts are not fully priced into the market.

The "peak earnings" debate is not the only challenge stocks are facing.

Andrew Harrer | Bloomberg | Getty Images

Everyone is expecting big earnings. With 20 percent earnings growth, the risk is to the downside. We saw this on Friday, when banks delivered in-line reports, but their stocks sold off. That trend reversed on Monday, a sign that this is not a broad worry about earnings peaking, at least not yet.

Still, it's definitely harder to impress investors: The bar is much higher now. The good news is there is clearly a floor under the market with trade issues, and perhaps Syria, calming down.

Then there is the Fed. The big issue, it seems to me, is interest rates. With volatility back down, we'll see if rates start moving up. We seem to be only one or two nasty inflation reports away from the markets making it a big worry once again.

UBS' Art Cashin agrees: "Part of that has to do with what you believe is happening with the Fed, and we're seeing some hints that inflation is moving up," he told CNBC. "If the Fed turns more aggressive, that will hold back the earnings picture."

The Fed itself seems conflicted on inflation. Dallas Fed President Rob Kaplan said Monday that "cyclical inflationary pressures are building," but he also noted that corporations still lack pricing power.

There's even less consensus on whether there is still a "Fed put" under the market, a belief that the Fed will step in and aggressively cut rates if the economy weakens. My sense is that there is not, that Fed Chairman Jerome Powell will not be as quick to cut rates as Janet Yellen.

Instead, we may be morphing into some new form of Fed "protection." There is some limit on the downside, but there may also be a cap on the upside. By that I mean the Fed will keep raising rates, but if things go bad, it will definitely slow the pace of increases.

That's not a "put," but it does seem to place the market in some kind of box. Perhaps we will test the markets with surprisingly strong earnings pushing us toward new highs, but the Fed hiking may prevent that from happening.

That seems a likely scenario.