In a recent note, strategists at Alpine Macro said analysts have underestimated this bull market at every turn. Despite widespread skepticism, the global investment firm believes stocks are poised to continue to outperform expectations, driven by expanding earnings growth and a resilient economy.
At midyear, the stock is trading above the highest price targets Wall Street strategists have set for 2024. This bullish trend indicates a significant gap between market performance and analyst expectations, with strategists’ targets being the furthest from actual price levels in recent quarters. Fund flows reflected this miscalculation, as investors remained underexposed to the stock during the rally.
According to Alpine Macro, several factors have contributed to the misunderstanding of this bull market. First, the long-awaited recession has not yet materialized.
“There has been a slowdown consistent with tighter financial conditions, but it has turned into a renewed slump in earnings across some sectors rather than a broader decline,” the strategists wrote.
Moreover, the tech giants have emerged as a unique bloc, less vulnerable to macro effects, allowing the broader U.S. stock index of large companies to advance strongly.
Thanks to these developments, corporate earnings have accelerated and exceeded expectations, and the long-term tailwinds driving tech giants have attracted global capital, boosting overall valuations.
The emergence of companies that demonstrate record levels of quality, profitability, and remarkable growth is an important feature of the U.S. large-cap stock market. These companies are largely insulated from the traditional business cycle, being closely tied to the overall technology adoption cycle.
The company noted that “its asset-light characteristics also make it more immune to interest rate policy.”
“In a period of unusual uncertainty, we find it plausible that most Mega Tech assets will achieve significant valuation premiums as investors prioritize visible sources of healthy growth,” she added.
The current bull market is supported by expanding earnings growth. Sectors that have weathered successive recessions are now poised to enjoy stable revenues and expanding profit margins.
Historical trends indicate that profit margins rebound shortly after major cycle declines, suggesting further upside ahead.
“Our company earnings model projects earnings of around $59 in the second quarter, and closer to $240 on an annualized basis,” the report says. “A bottom-up estimate, which aggregates earnings data for each company, suggests a better forecast of closer to $250 for the year.”
The aggressive bullish thesis for stocks includes a potential “offset” move in broader market valuations, bringing them in line with the high valuations of leading mega-cap companies, Alpine Macro strategists said.
It shows the path of the S&P 500 if the rest of the market sees the same degree of expansion that the Magnificent 7 has seen since 2023. If this catch-up occurs, the implied value of the S&P 500 will be closer to 6,500 than its current level.
“Of course, this is an exaggerated assumption,” they warned.
A fair value valuation model that incorporates a variety of fundamental and cross-asset inputs suggests a fair P/E multiple of 20x. Applying this valuation to the entire index implies a price level of 5,200. However, applying this multiple to the rest of the index while holding Mega Tech’s valuations constant would produce a price level of 5,700.
“Given our expectations for earnings growth trajectory, we find this to be a reasonable intermediate target,” the strategists concluded.
