The market has now rallied 8.5% from its lows on February 24, and it’s starting to feel like we might even be heading back to all-time highs.

Even though the news can be bad, we’ve been expecting this rally…

For instance, on March 14, Jeff Clark wrote that the high-yield market had “positive divergence… often an early warning sign of a trend change from bearish to bullish.”

And on March 8, I called for a shift in market sentiment as investors re-focused on the Fed and away from the war. I said, “I believe this war (at least in its current form) has already been priced into the market. A small 25-basis point rate hike on March 16 – may set off a rally to retest the 4450 area sooner rather than later.”

Then on Friday, the S&P 500 closed at 4463…

Considering everything that’s happening – like the war in Ukraine and a hawkish Fed – it could have been much worse.

So now that the market hit that price target, my next question is… are we heading back to new all-time highs?

Real-time GDP data coming out of the Atlanta Fed may help answer that question…

The Atlanta Fed estimates the growth rate of real gross domestic product (GDP) with their GDPNow forecasting model (a running estimate of real GDP growth based on available economic data for the current measured quarter).

It’s a better indicator of broad-based economic growth than waiting for the actual GDP release – which uses older data.

Take a look at this chart…


Right now, their model is estimating only 1.25% GDP growth…

That’s a significant development. It means the afterglow of growth we saw coming out of the pandemic is almost gone.

GDPNow is basically saying we have the same growth rate we did before the pandemic started… but with much higher inflation.

Which is why growth in consumer spending – making up two-thirds of GDP – is only projected to grow around 3.2% this year. That’s down from 7.9% last year.

Consumers can’t maintain the same level of spending when their buying power is falling at a 10% clip.

So, this drop-off must affect earnings growth on an aggregate basis.

And given that anemic estimate of GDP growth from the Atlanta Fed, it’s hard to see where companies will generate the type of growth that would justify new all-time highs.

You see, the price level of the S&P 500 is determined by how much investors are willing to pay per dollar of earnings.

Right now, the market expects the S&P 500 to generate $228/share over the next 12 months. It was trading at 4463 on Friday… Meaning, with this recent market rally, the S&P 500 is back to trading at a 19.50 price-to-earnings (P/E).

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That also means for the market to return to 4800 (it’s all-time high) while maintaining its already lofty 19.50 P/E, earnings would need to grow by an additional 8% on top of what is already projected (or $246/share).

That seems unlikely to happen, considering the market’s current earnings projection of $228/share is already penciling in a 17% earnings growth rate for the next 12 months.

I just don’t see where the additional growth will come from.

So this recent rally, although expected, is a good time to start thinking about going the other way…

As I said in an essay from January 28, I think the market will trade at its long-term average earnings multiple of 17.75X.

And even if aggregate earnings maintains that 17% rate… that would translate to an S&P 500 price level of right under 4,000 – a level I think we’ll get to faster than 4800.


Eric Shamilov
Analyst, Market Minute

Reader Mailbag

In today’s mailbag, Market Minute subscriber Robert thanks Jeff on his recent essay on limit orders

Dear Mr. Clark,

I read this article before and always used limit orders. So, after reading this I sold an option at market, and you are totally correct… I was taken to the cleaners. That really po’ed me because it was a decent amount. Thanks for the reminder.

– Robert F.

Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].