Markets, and particularly equities, built in “great expectations” over a five-month rally that found global shares rising some 25% from the local lows. Those expectations, Morgan Stanley’s Mike Wilson said Monday, “demand an earnings boom.”

It’s becoming quite difficult to editorialize around the same skepticism and excuses week after painful week. It’s not so much that I’m exhausted with it. Rather, I find myself discomfited by the increasingly glaring disparity between recycled bearish talking points and an unyieldingly bullish tape.

The starkness of that juxtaposition isn’t lost on readers. Drawing attention to it every Monday thus feels gratuitous. I’m knowingly eliciting eye-rolls. And not at me. But at a handful of rally skeptics. Discretion is often the better part of valor, but the meaning of “discretion” isn’t fixed. At some point — let’s call it 10% ago — not participating in equity upside became the riskier proposition when the alternative was jumping aboard a moving train.

Eventually, this rally’ll run out of gas. They all do. Even if we’ve just witnessed the birth of a new secular bull market, as the likes of BofA’s Savita Subramanian believe, pullbacks and corrections are inevitable. But my goodness: I’m taken aback by the extent to which skeptics’ obduracy is now manifesting in something that looks quite a bit like reality denial. It’s not just a little (or a lot) of forgone upside. We’ve just witnessed one of the most unremitting five-month melt-ups in history. Even if it ends tomorrow in a sudden lurch lower, it won’t change the fact that bears were summarily routed since October to an extent that in my eyes anyway, makes redemption well nigh impossible.

On Monday, Wilson blamed easier financial conditions (again) and reiterated that “higher valuations rather than improving fundamentals” are behind stocks’ gains. He’s not wrong but… well, it’s been 25% since he said, on October 30, that a Santa rally was unlikely. “Granted, higher asset prices often beget even higher asset prices as investors feel compelled to participate,” he went on. “From our perspective, it’s hard to justify the higher index-level valuations based on fundamentals alone, given that 2024 and 2025 earnings forecasts have barely budged over this time period.” (Folks: Equities don’t need “fundamentals” to move higher. Wilson knows that better than anybody.)

He cited elevated multiples, which he compared to 2021’s “everything bubble,” and said investors are now anticipating an EPS growth inflection. Such expectations may pan out due to the “recent easing of financial conditions,” but as it stands, “bottom-up expectations for 2024 and 2025 remain flat post the Fed’s Q4 dovish shift,” Wilson wrote, adding that for small-caps, earnings estimates are down 10% for this year and 7% for next. For (at least) the third week, he said “heavy” fiscal policy paired with tight monetary settings is “crowding out many companies and consumers.”

The charts above are just annual EPS and EPS growth charts with consensus forecasts for this year and next.

To be fair, Wilson’s not overtly bearish. In 2024, his notes seem to focus more on how to position within equities rather than on grand narratives about the likely trajectory of the index. In that regard, he said Monday that Industrials are exhibiting strong breadth, not surprising given they’re “a beneficiary of major fiscal outlays,” and he also said Energy shares “could be due for a catch-up.” Energy, he remarked, “has contributed more to the change in S&P earnings since the pandemic than any other sector, yet it remains one of the cheapest and most under-owned areas of the market.”

Meanwhile, JPMorgan’s Mislav Matejka echoed the notion that high valuations leave less room for error, both on the earnings and policy fronts. “If activity momentum, and in particular earnings delivery, disappoints, and central banks end up more reactive than proactive, we think equity multiples would need to fall,” Matejka wrote, noting that “the bulk of the equity performance so far this year, and indeed in the past 18 months, was driven by multiple expansion.

The figures speak for themselves. The chart on the left is just the forward multiple for the MSCI World gauge. The table on the right gives you some context for the scope of the multiple expansion since the cycle lows for equities in October of 2022 through today.

“Globally, 12-month forward earnings are up only 7% from the lows, in contrast to the nearly 30% P/E upmove,” Matejka said.

He seems skeptical that monetary policy on its own will be sufficient to sustain the re-rating. “Central banks are set to deliver some cuts in the second half, but in order to justify current equity valuations, we believe that we will need to see at least some earnings acceleration as well,” according to Matejka.