It’s Time To Have A Serious Conversation About Inflation

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It’s Time To Have A Serious Conversation About Inflation

Stellar U.S. Earnings A Solid Anchor For Equity Prices … Thus Far At Least!?

The events in the Middle East were certainly shocking at first and equity markets reacted accordingly. That said, once investors refocused on

earnings in April it felt like equities were basically looking past the situation in Iran. This is a bit of an exaggeration, but dynamically speaking it

certainly looks that way. The earnings picture for the S&P 500 is absolutely stunning right now. Not only are earnings expectations recovering

broadly BUT the Technology sector is growing at rates never seen before. This is obviously a positive, but it raises the question of whether it’s

sustainable, AND also whether we might be getting a tad ahead of ourselves. The good news for now is that this is a fairly broad-based rebound

and is still substantial for cyclical sectors of the market.

Tech Earnings Have Been Particularly Impressive … … But Cyclicals Are Not Missing Out

60% 60%

Source: BMO Capital Markets

70% 70% 50% 50%

40% 40% 50% 50%

30% 30%

20% 20%

10% 10% 10% 10%

0% 0%

-10% -10%

-30% The Tech sector is posting its strongest -30% -20% -20%

Forward Earnings growth on record, +57%! Source: BMO Capital Markets

-30% -30%

-50% -50%

Jun-23 Dec-24 Jun-26

Jan-97 Jan-05 Jan-13 Jan-21

Forward Earnings Growth

Forward Earnings Growth Energy Industrials

Comm. Services Technology Consumer Discretionary Materials Financials

There’s good news on the sustainability issue, for the broader market at least. The lagged effects of stimulus sparked the recovery in earnings

estimates. It doesn’t always look that way when analyzing a specific security, but the ebbs and flows in the economy explain trends eventually seen

in earnings. This is where the causality lies.