00:00 Speaker A
Stock futures are lower this morning. Following that disappointing private payrolls reports, still, stocks are, uh, and trading right now, causing speculation on Wall Street that markets could be in bubble territory. The rebound from lows in April to fresh all-time highs at the end of the second quarter sparking a jump in Barclays' irrational exuberance gauge, which actually measures the percentage of stocks in euphoric territory. It currently sits just above 10%, which has signaled extreme frothiness in the past. So what does this mean for investors? Joining me now, we've got good friend of the show, Sam Stovall, CFRA Research Chief Investment Strategist. Sam, good to see you here this morning, and thanks for taking some time ahead of the market open. First and foremost, I I would love to get your assessment of what is being dubbed and called this irrational exuberance with us essentially still in this ballpark of some of the all-time highs that we saw notched earlier this week.
01:44 Sam Stovall
Well, good morning, Brad. Uh, yeah, I think people are a bit concerned because we went through a very steep V-shaped decline and then recovery. Yet history actually says that that's typically what happens because we went from a new all-time high to the minus 10% threshold in only 22 calendar days versus the more normal 80 plus days. Uh, that implied that this decline was going to be swift, shallow, and the recovery would be quick at hand, which is exactly what we got. Instead of the four months that we normally take, uh, to go into a correction and then another four months to get out of that correction, those numbers were essentially cut in half. And actually because people are so concerned, uh, I think that history again will remind us that we tend to advance another 10% following the recovery of the old high. So, um, you know, while we can always see some sort of digestions of gains, uh, I think the overall trend remains upward.
03:25 Speaker A
And so with that in mind, that if we're looking at an overall trend that remains upward, what what perhaps is the major kind of additive to the mindset and and and how far out investors might be looking through some of the trade deal negotiations, through a bill that's working its way now back through the house, and then, oh yeah, we're trying to figure out exactly what companies might say during earnings season in the next few weeks here as that kicks off.
04:09 Sam Stovall
Sure. Well, I think that, uh, an initial reactions are like dropping a ping pong ball on the table. The first response is the greatest, and then subsequent ones are more muted. And that's what we have seen regarding the the tariff situation, uh, regarding the, uh, one big beautiful bill, et cetera. Um, and also, uh, because we had a worry that we were headed for recession. And bull markets don't die of old age, they die of fright. And what they're most afraid of is recession. But because of the recovery, the old adage of prices lead fundamentals implies that maybe we're seeing, uh, a near-term bottom in terms of earnings projections. Q2 results are now expected to be up only about 2% versus the near 10% advance that was expected at the end of 2024. So, uh, I think with the bar set so low, uh, that we'll probably end up seeing actual results exceed end of quarter estimates once again, which will make the 63rd quarter out of the last 65.
05:48 Speaker A
You know, that that's so interesting, and and I was discussing this yesterday with a few of our guests, and would love to get your thoughts on this too since you raised the fact that this earnings growth rate, uh, could be one of the lowest growth rates that me we see since Q4 2023, according to fact set, if it does come in at this 5% earnings growth rate for Q2 for the S&P 500. Can you can you make sense of the fact that we we've got that in one hand, and then on the other hand, you've got forward 12 month PE ratio sitting for the S&P 500 at 21.9, which is above the five-year and the 10-year average right now.
07:05 Sam Stovall
That's right. Well, I think your first thought is that, uh, fact sets estimate for Q2 is above 5%. S&P Capital IQ estimates, which is what we use, uh, is about 2%. So there is no, uh, FASB designated definition of operating earnings. Most people simply call it earnings before bad stuff. Uh, but still, the bar is set very low, and as my father used to say, rarely do you injure yourself falling out of a basement window. So I think we probably will be surprised to the upside when Q2 results are are com. Uh, but in terms of the PE ratio, you're absolutely right. If you look back, uh, over the many years, uh, the it is elevated, but I think that we're likely to see these earnings estimates increase as time goes on in a sense to match what happened with prices.
08:32 Speaker A
Sam, we're marching to the opening bell here. We got to leave the conversation there. Great to see you, as always.
08:40 Sam Stovall
Thanks, Brad.
08:42 Speaker A
Thank you.
