There were two substantial changes to my Market Multiple Table in July compared to June. Both were positive and helped to mostly justify the current valuations for stocks – earnings expectations went up and geopolitical concerns went down, says Tom Essaye, president of the Sevens Report.
Still, the assumptions underlying this market are extremely optimistic and do not leave any room for disappointment. Risks of an air pocket remain.
Current Situation: Data center spending is supporting earnings and economic growth while inflation remains high. There are anecdotal signs inflation pressures could be receding (lower oil and some falling leading price indicators). The current situation reflects a solidly positive market setup.
Things Get Better If: Q2 earnings reports further reaffirm aggressive earnings growth and solid economic growth expectations, while key inflation metrics decline, easing rate hike concerns.
This outcome would essentially be “more of a good thing” as earnings growth expectations would increase and the market multiple could rise slightly higher. This outcome puts 8,000 in the S&P 500 Index (^SPX) into the realm of possibility.
Things Get Worse If: AI/data center spending intensions begin to get cut, which will hurt both earnings and economic growth. Plus, inflation does not recede as expected — increasing the chances of a rate hike cycle.
This outcome would “reverse” the reasons for the gains since April and put the entire rally at risk, as earnings and economic growth are now tied to AI/data center spending. Rising rate hike expectations would directly pressure the market multiple towards (and below) 20.
