Boockvar: Most earnings growth is from two sectors; the rest of the S&P shows lags

Key Concepts:

• Tariffs and their impact on earnings and GDP
• Stagflation (inflation with slow growth)
• Earnings growth concentration in technology and communication sectors
• P/E (Price-to-Earnings) ratio and market valuation
• Consumption tax implications of tariffs

1. Tariffs and Market Concerns:

• The analyst, Peter, disagrees with the notion that tariff concerns are overblown.
• Excluding technology and communication sectors, S&P earnings are up less than 1%, with revenue growth around 3%, aligning with nominal GDP.
• Recent CPI data shows annualized gains in core goods prices (imported items), indicating tariff impact.
• The analyst believes the tariff situation will persist for months, even with potential deals, due to the highest tariff rates in over 100 years.

2. Economic and Market Consequences of Tariffs:

• Tariffs are leading to reduced GDP estimates and potential stagflation (slight inflation with slowing growth).
• Companies like GM have seen profit reductions, and many have reduced guidance.
• If Q2 GDP growth is 2.5% as predicted by the Atlanta Fed, the first half of the year will have an annualized growth of 1%.
• There's a risk that the second half of the year will see less than 1% growth due to tariffs.
• It's challenging to generate top and bottom-line earnings growth with such low GDP growth.

3. Earnings Growth Disparity:

• Big cap tech companies are driving earnings growth, while the rest of the market shows little to no growth.
• The stock market is optimistic that tariff concerns are overblown, but the analyst favors low taxes.

4. Tariffs as a Consumption Tax:

• Tariffs act as a consumption tax, paid by producers, consumers, or both, despite income tax cuts.
• Reduced company guidance due to tariffs will likely lead to lower earnings estimates.
• If estimates are lower, the market's ability to climb higher, even with companies beating those estimates, is reduced.

5. Market Valuation and P/E Ratio:

• Almost all earnings growth is concentrated in two sectors, with about half of the S&P seeing earnings declines.
• The market relies on the dominance of big cap tech for index performance.
• The analyst notes that the market is experiencing an expansion in the P/E multiple.
• The forward 12-month P/E ratio is around 23 times, approaching the levels seen in March 2000 (24.5 times).
• The market is in "rarefied air" with stretched valuation metrics.

6. Conclusion:

• The analyst suggests that while the market can remain elevated for a while, people should understand the underlying dynamics.
• The key takeaway is that the market's performance is heavily reliant on a few sectors, and tariff impacts are not fully priced in, leading to potentially unsustainable valuations.