It's now 60 percent through earnings season, and analysts are tripping all over themselves trying to advance the dominant theme of "peak earnings."
They have added two other problems for stocks: higher rates and slower global growth. This triumvirate (peak earnings + higher rates + slower growth) is creating a formidable obstacle for stock advancement.
Let's start with the current complaint. The market has not rallied on earnings, analysts say. They are only half right. The S&P is flat since J.P. Morgan kicked off earnings season on April 13. Industrial stocks are down since then. Semiconductors have sold off, down more than 5 percent. The market leadership is narrow, with energy the only prominent sector stepping forward.
But the argument that there has been no reaction to stronger earnings is simply nonsense. The market had its rally on tax cuts and stronger earnings — but that happened mostly in the fourth quarter last year. From October through mid-January — the period when the market was obsessed with the implication of tax reform on earnings — the S&P 500 went from 2,500 to almost 2,900, or a 16 percent increase in less than four months.
As for "peak earnings," Michael Wilson, chief U.S. equity strategist and CIO of Morgan Stanley Wealth Management, said in a note to clients on Sunday that "[W]e think the market is digesting the fact that the tax cut last year has created a lower quality increase in US earnings growth that almost guarantees a peak rate of change by 3Q."
Look, I get it. Everyone knows the tax cuts are giving a one-time boost to stocks. The S&P 500 will see profit growth of about 20 percent this year, and only half that in 2019. But that is still growth, and record growth at that.
"Peak earnings" is a bogus argument for selling stocks, providing there is still a background of growth, and particularly with the S&P 500 trading at a very reasonable multiple of a little more than 16 times 2018 earnings.
However, recently the macro backdrop has become noisier. Rates have risen. Central bank chiefs Mario Draghi (Europe), Haruhiko Kuroda (Japan) and Mark Carney (England) have been sounding a bit more dovish recently on growth, and the euro has weakened.
And that, combined with trade issues, has given the bears an opening.
Stocks dropped considerably in February as the market began to address the implications of higher rates and higher wages. Bears have combined the "slower growth" and "higher rates" story to argue that earnings expectations, while high currently, will likely decline as we get into 2019. Most do not use the word "stagflation" outright (higher rates + slower growth = stagflation) since there is no consensus around the degree of growth slowing and rates rising.
Regardless, this is creating a potent "stew" that is forcing stocks to remain range-bound despite rising earnings expectations.
How much is global growth truly slowing? I think Goldman Sachs has the right tone. In a note to clients late last week, Goldman's global markets analyst Caesar Maasry characterized global growth as "strong but slowing." He noted that not all slowdowns are created equal: Slowdowns (and stock sell-offs like we have seen) are more significant ahead of recessions, but that is not in the cards: "[W]e expect the recent soft patch in growth to be short lived," Maasry concluded.
Even the first-quarter slowdown in U.S. economic growth (GDP was 2.3 percent) is being met with the usual skepticism: "We expect faster growth in Q2 and throughout the year," UBS said in a note to clients.
It's obvious to me that the market is entering a consolidation phase after an enormous move at the end of last year. Combining hot-button phrases like "peak earnings" and "higher rates" and "slowing growth" is a potent stew, but bears are likely pushing their case too far.