Earnings Versus the Bubble

Supposedly overvalued equities are enduring their third mild correction this year, against the backdrop of violent corrections in purported bubble asset classes such as Bitcoin, Tesla and SPACs. Stocks were supposed to roll over when this happened, but they have not – it is turning out to be a healthy sector rotation and an earnings upgrade boom. S&P 500 sector performance has changed places year-to-date versus 2020, with last year’s winners the weakest, and last year’s losers the strongest. This earnings season is the fourth record-setter in a row, demonstrating that the consensus can’t get optimistic enough. The upgrade rate of forward earnings has been elevated all year and is now at a near record. This reflects cyclical recovery combined with the emergence of a productivity boom. The probability of an earnings-damaging corporate tax hike are diminishing.