MW: Stock-market investors bank on earnings growth running triple the norm – economist

MARKETWATCH reports:

Earnings growth expectations have been running hot, fueled by optimism around artificial intelligence. But just how hot?

Economist David Rosenberg, founder of Rosenberg Research, said in a Tuesday note that his firm had managed to arithmetically “back out” from current valuations what the stock market is saying about expectations for average EPS (earnings per share) growth for the S&P 500 over the next five years.

The answer: plus-17% per annum. That’s mighty optimistic, Rosenberg noted, running nearly triple the actual long-run average plus-6% for earnings growth in a five-year span over the past century. In statistical terms, investors are pricing in a nearly 2 standard-deviation event.

“Outside of the distortions around COVID-19 in 2020, this embedded EPS growth forecast was only exceeded by the prior Tech mania in the late 1990s. And we know how that ended —inevitably, that five-year forward earnings growth view reverted to the mean as the sector (as is typical with manias) became beset with excess capacity.” he wrote.

There are clear differences between now and then, he added, but the storyline is that all manias end up confronting the rule laid out by technical analyst Bob Farrell in the 1990s: Markets tend to return to the mean over time.

“There are clear differences between now and then, but the storyline is that all manias end up confronting the classic Bob Farrell rule #1 on mean reversion,” Rosenberg wrote.