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Why this is the most misunderstood bull market


Analysts have underestimated this bull market at every turn, Alpine Macro strategists said in a recent note. Despite widespread skepticism, the global investment firm believes equities are poised to continue surpassing expectations, driven by broadening earnings growth and a resilient economy.

At the midpoint of the year, the S&P 500 is trading higher than the top price targets set by Wall Street strategists heading into 2024. This bullish trend points to a significant disconnect between market performance and analyst predictions, with strategist targets being the furthest below actual price levels on record in recent quarters. Fund flows have mirrored this miscalculation, with investors remaining underexposed to equities during this rally.

Several factors have contributed to the misunderstanding of this bull market, according to Alpine Macro. Firstly, the much-anticipated recession has yet to materialize.

“There has been a slowdown, consistent with tightening financial conditions, but it’s morphed into a rolling profit recession across some sectors as opposed to a broader decline,” strategists wrote.

In addition, mega tech companies have emerged as an idiosyncratic block, less vulnerable to macro influences, allowing the broader large-cap U.S. equity index to power ahead.

Thanks to these developments, corporate earnings have accelerated and topped expectations. The secular tailwinds propelling mega tech have attracted global capital, boosting aggregate valuations.

The emergence of companies demonstrating record levels of quality, profitability, and visible growth is a significant feature of the U.S. large-cap equity market. These companies are largely insulated from the traditional business cycle, being more closely tied to the adoption cycle of ubiquitous technologies.

“Their asset-lite characteristics also make them more immune to interest-rate policy,” the firm noted.

“In a period of unusually high uncertainty, we find it reasonable for most elements of Mega Tech to achieve large valuation premiums as investors prioritize visible sources of quality growth,” it added.

The current bull market is further fueled by the broadening of earnings growth. Sectors that have managed through rolling recessions are now set to enjoy stabilizing revenues and expanding profit margins.

Historical trends suggest profit margins bounce back soon after major cycle troughs, hinting at more upside to come.

“Our corporate earnings model projects earnings of approximately $59 in Q2, and closer to $240 on an annualized basis,” the report states. “The bottom-up estimate, which aggregates earnings data for each company, points to an even better outlook closer to $250 for this year.”

Alpine Macro strategists said an aggressive bull thesis for equities includes a potential “catch-up” move in valuations for the broader market, aligning it with the high valuations enjoyed by Mega Cap leaders.

They illustrate the trajectory of the S&P 500 if the rest of the market experienced the same degree of expansion as the Magnificent 7 since 2023. If this catch-up were to occur, the implied value of the S&P 500 would be closer to 6,500 rather than its current level.

“Of course, this is a stretched assumption,” they caution.

Their fair-value valuation model, which incorporates a variety of fundamental and cross-asset inputs, suggests a fair-value price-to-earnings (P/E) multiple of 20x. Applying this valuation across the entire index would imply a price level of 5,200. However, applying this multiple to the rest of the index while keeping Mega Tech valuations constant would produce a price level of 5,700.

“Given our expectation for the trajectory of earnings growth, we find this to be a reasonable intermediate target,” the strategists conclude.

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