LIVE MARKETS-S&P 500's twin boom in prices and profits may signal leaner returns ahead

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S&P 500'S TWIN BOOM IN PRICES AND PROFITS MAY SIGNAL LEANER RETURNS AHEAD

The US stock market's remarkable run has pushed both share prices and corporate earnings to historically elevated levels, according to a Ned Davis Research report, potentially limiting future returns.

Ed Clissold, chief US strategist at Ned Davis Research, wrote the S&P 500 index .SPX stands 85% above its long-term trendline dating back to 1925, a level exceeded only during the late 1920s and the dot-com era around 1999-2000.

Historically, when the S&P 500 has been more than 30% above its trendline, it has risen at a paltry 1.1% per year, according to the report. At the same time, earnings are also highly stretched, running 66% above their long-term trendline.

As of July 31, EPS was 66% above its trendline, and including consensus estimates, earnings should be 92% above by March 2027, the most since 1930, the report said.

While strong earnings are typically supportive of stocks, the research suggests that periods of exceptionally rapid profit growth have historically been followed by weaker market returns.

The firm said earnings are so far above their long-term trend partly because the US economy has spent only two months in recession over the past 17 years, alongside one-off factors such as tariff refunds and unrealized gains in equity investments.

NDR finds that the strongest gains have come when both price and earnings have been at least 30% below their trendlines. The weakest returns have come when both are at least 30% above their trendlines.

According to the firm, the current 25-month streak of both price and earnings being at least 30% above their long-term trendlines is the longest since the late 1920s.

"Higher earnings are needed for stock prices to rise. The question is whether there can be too much of a good thing. Even for earnings, the answer is yes…eventually," Clissold said.

(Joel Jose)

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