Key Points

  • Earnings-driven (and also FOMO-driven) market is breaking records and raising questions.

  • Smart money getting more optimistic.

  • Inflation and tighter monetary policy could be triggers for a bumpier road this year.

U.S. equities have pitched to new all-time highs on the back of a near-commensurate surge in earnings. Fourth quarter earnings per share for the S&P 500 are on track to be up 12% for both last year’s fourth quarter and the full calendar year of 2017. But the real story is about expectations for 2018 earnings. Just over the past three weeks, expectations jumped from 12% to 16% growth for the full year, nearly all due to tax reform.

I don’t want to throw cold water on the improvement to earnings, but do want to note that investors should be careful about wishing for even higher earnings from here. The stock market is a discounting mechanism and as you can see in the table below, the highest zone for year-over-year earnings growth has historically been met with middling market gains. It highlights that once the earnings expectations bar gets set at the highest level, the likelihood of disappointment rises as well.

Source: Ned Davis Research (NDR), Inc. (Further distribution prohibited without prior permission. Copyright 2018 © Ned Davis Research, Inc. All rights reserved.)

The force of the move this year is notable. It’s shaping up to be not just an earnings-led surge, but also a FOMO-driven market. For the less-text lingo savvy among us, that stands for “fear of missing out.” Stocks have been gapping up in the morning nearly every day. During the past 30 trading sessions, more than 85% of them have seen the S&P 500 futures open higher than the prior close. According to SentimenTrader (ST), that is—by far—the most since futures began trading in 1982. In other words, “there has never been a time when traders were so eager to buy stocks that the futures were up almost every single day over such a long time period.”