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Chart of the Week - Exponential Expectations

If you want one chart to capture the current market zeitgeist this one comes pretty close. The great reset of 2020 has triggered increasingly great expectations, particularly so when it comes to earnings…

The IBES “Long Term Earnings Growth“ estimates have made an exponential move a new ‘higher plateau’. And with valuations at evermore extreme levels, one had better hope that there are some credible if not incredible expectations to back it.

chart of S&P500 long term average earnings growth estimate

Before we go further, a quick note on what this chart actually is. The data is put together by Refinitiv (I/B/E/S) and represents the consensus of Wall Street analysts. Specifically, this metric is the expected annual increase in earnings over the business cycle - in practice these forecasts typically look 3-5 years out.

On the chart I’ve denoted the various ages and epochs - twists and turns - in what you might have thought would be a fairly plain and stable metric. It seems analysts are just as liable to the ebb and flow in human emotions and crowd psychology as the rest of us. But what’s remarkable is seismic shifts seen in the last few years, particularly over the past year.

Clearly there are going to be some distortions at play in the wake of the pandemic perturbations, but it goes to show: 1. how resolutely despair set in at first; and then 2. how historic stimulus shocked markets into a speculative fervor.

While we may well be in a new paradigm or secular regime, I have more faith in cycles - and I’m confident that at some point policy stimulus will come full circle. The risk then is that exponential expectations face evaporation.

Until then though, the music is still playing…

Bottom Line: Analysts expect roaring growth of earnings in the 2020’s.

NOTE: this post first appeared on our new Chart Storm Substack:

Best regards,

Callum Thomas

Head of Research and Founder of Topdown Charts

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