Markets erupt higher… is this rebound real or a temporary?… diagnosing why stocks are falling… the dance between sentiment and earnings… don’t miss Louis Navellier’s 50X small-cap idea

As I write Friday, stocks are ripping higher.

Is this the beginning of a sustained, bullish rebound? Or bullish fool’s gold before the next leg lower?

To help answer this, let’s diagnose the problem.

The market currently has a “sentiment” problem.

The good news is that – at least for the moment – it’s not an “earnings” problem as well. And that should limit how much downside remains in front of us, if there’s any at all.

Let’s break this down.

There are two key variables that influence the price of each stock you own

• The earnings of your underlying companies
• The multiple that investors are willing to pay for those earnings – which we can think of as “investor sentiment”

In the short-run, investor sentiment is unquestionably the greatest influence on stock prices.

On any given day, gleeful or despondent investors can drive stocks to unfathomable heights or depths based on greed and fear.

But in the long run, stock prices always return to their true master: earnings.

To illustrate, check out the chart below that shows us the key drivers of stock performance over various lengths of time.

The column on the left shows us the drivers over one year. “Multiple” (which means “investor sentiment”) is in red; it’s the dominant influence at 46%. Revenue growth (the basis for “earnings”) is in blue; it accounts for just 29% of stock-price performance.

But see how this flips the further out you go (the columns to the right).

After 10 years, sentiment drives just 5% of stock performance.

For another angle on this, below is a chart dating to 1945 comparing the S&P 500’s price to its trailing 12-month operating earnings.

Notice how over the long-term, these two lines have an amazingly strong correlation. This underscores our point: In the long-run, earnings drive stock prices.

But also, you’ll see how the S&P’s price line (in green) bounces all around the S&P’s much smoother earnings line (in blue).

This is showing us how price – pushed and pulled by sentiment – soars and crashes… yet always returns to the earnings line.

So, where are we with this earnings/sentiment dance today?

In recent weeks, the stock market has been tanking largely due to the investor sentiment part of the equation

And this just prompted legendary investor Louis Navellier’s favorite economist, Ed Yardeni, to lower his S&P 500 forecast.

Yardeni has been one of Wall Street’s leading bulls in recent years – which has been the correct call. Today, he remains broadly bullish. To that end, he hasn’t changed his forecast for 2025 earnings, but he’s pulling back on his sentiment multiple.

From MarketWatch:

Yardeni is sticking with his view that S&P 500 companies will earn a combined $285 per share…

But he is blinking on the valuation multiple, now expecting a range of 18 to 20 instead of 18 to 22.

That takes Yardeni’s best-case scenario down to 6,400 from 7,000 (and also his year-end 2026 view down to 7,200 from 8,000). His “worst-case scenario” for the end of 2025 is now down to 5,800.

The good news is that Yardeni’s updated “worst-case scenario” still has the S&P climbing almost 4% from where it trades as I write.

This isn’t to say that Yardeni doesn’t recognize the potential for earnings to take a hit. Here he is, with a warning:

The latest batch of economic indicators released on Monday, Tuesday, and Wednesday supported our resilient economy scenario with subdued inflation.

Nevertheless, we can’t ignore the potential stagflationary impact of the policies that Trump 2.0 is currently implementing haphazardly.

But Goldman Sachs has, in fact, lowered its earnings forecast due to tariff wars

It’s not a drastic reduction, from $268 to $262. For perspective, the broad Wall Street consensus is $270.

Here’s MarketWatch explaining:

[The reduced earnings forecast is] in reaction to Goldman’s economists earlier this week lowering their GDP view on expectations of a 10-percentage-point tariff-rate increase.

The simple math is that every five-percentage-point increase in the tariff rate reduces S&P 500 earnings by 1% to 2%.

The new earnings forecast also took into account elevated uncertainty and tightening financial conditions.

Meanwhile, like Yardeni, Goldman also lowered its sentiment multiple. But again, not by much – from 21.5 to 20.6.

From Goldman:

The headwinds to equity valuations from a spike in uncertainty are typically relatively short lived.

However, an outlook for slower growth suggests lower valuations on a more sustained basis.

But here, too, Goldman sees stocks climbing from here to end of 2025, even after its reduced forecast. It puts the S&P at 6,200 by year-end, which is 11% higher.

So, if earnings are remaining relatively robust in these projections, then might this “sentiment” correction be healthy?

Yes.

At the end of last year, sentiment had reached bullish extremes. That type of enthusiasm is fun, but it’s flimsy and usually doesn’t last for too long.

Below, we look at the S&P 500’s price in light blue compared with the change in the S&P’s forward 12-month earnings estimate dating to 2015.

Notice how price (in this case, our loose proxy for sentiment) had soared far higher than earnings estimates coming into 2025.

So far, given that earnings are holding up well, the pullback has reflected waning sentiment – but this has meant that the price/earnings divergence has narrowed to a more reasonable level.

If we want a long-term bull, this is good news. It’s like letting some air out of an overinflated balloon.

But will this pullback remain a relatively mild “sentiment” drawdown or intensify into a “sentiment + earnings” bear?

That’s the question.

After all, a “sentiment” pullback would mean we should be looking for great buying opportunities today. A “sentiment + earnings bear” would suggest a defensive posture.

Here are some numbers on the two scenarios…

MarketWatch found that when stocks fall 10% but don’t enter a recession, buying the S&P (after it has fallen 10%) has delivered gains six months later nearly 90% of the time (using data since 1980).

But if both sentiment and earnings take a hit, resulting in a bear market, the median S&P 500’s peak-to-trough pullback would be a 24% decline.

Let’s return to the question…

Do we need to be prepared for another massive leg lower in stocks due to an earnings collapse?

It doesn’t appear that way currently.

Here’s FactSet, which is the go-to earnings analytics group used by the pros:

For Q2 2025 through Q4 2025, analysts are calling for earnings growth rates of 9.7%, 12.1%, and 11.6%, respectively.

For CY 2025, analysts are predicting (year-over-year) earnings growth of 11.6%.

It’s going to be very hard to have a deep, sustained bear market with that kind of earnings growth.

Meanwhile, FactSet reports that while executives have been discussing tariffs on their earnings calls, they haven’t been mentioning “recession” with any great urgency.

Back to FactSet:

Through Document Search, FactSet searched for the term “recession” in the conference call transcripts of all the S&P 500 companies that conducted earnings conference calls from December 15 through March 6.

Of these companies, 13 cited the term “recession” during their earnings calls for the fourth quarter.

This number is well below the 5-year average of 80 and the 10-year average of 60.

In fact, this quarter marks the lowest number of S&P 500 companies citing “recession” on earnings calls for a quarter since Q1 2018.

But what about the recent GDP reduction that points toward a recession?

To make sure we’re all on the same page, the Atlanta Fed’s GDPNow Tool provides a “nowcast” of the official GDP estimate prior to its release by using a methodology similar to the one used by the U.S. Bureau of Economic Analysis.

As I write, it’s showing a steep contraction of -2.4%.

We need to take this with a big grain of salt.

To explain why, here’s Louis from Wednesday’s Flash Alert podcast in Breakthrough Stocks:

The data doesn’t support us going into a recession.

Now, I’ve mentioned to you folks that the trade surpluses are ridiculous because companies were dumping goods on America.

The first indication was the 34% surge in January. We’ll see what the February trade number will be, but that could cause negative Gross Domestic Product (GDP).

However, according to the Institute of Supply Management (ISM), manufacturing has been growing for two months in a row after contracting for 26 months, and services actually picked up.

The U.S. is a predominantly service-led economy, so the data doesn’t support the narrative that we’re going into a recession.

Circling back to our focus on earnings, Louis is the perfect person to chime in on today’s theme of “sentiment” and “earnings”

After all, as we highlighted in yesterday’s Digest, Louis’ entire approach to the market centers on identifying stocks displaying fundamental strength.

True to form, here’s what Louis said on Wednesday to his subscribers:

I want to reassure you that earnings are working.

I also want to reassure you that when we had this very sharp correction that analysts never cut their estimates…

We’ll keep an eye on everything, and we’ll just keep you in the crème de la crème – the best stocks.

Speaking of crème de la crème, a reminder that Louis just flagged his top quantum computing stock. He believes it has 50X upside potential as quantum computing technologies hits the mainstream (there’s breaking news on this that we’ll feature in Saturday’s Digest – be on the lookout).

Louis also pointed toward a key catalyst happening this coming Thursday – Nvidia Corp.’s (NVDA) “Quantum Day.” Here’s Louis:

Next Thursday,I believe Nvidia will stake its claim in the quantum computing space. And when it does, this little-known top pick could erupt overnight.

Yesterday, I revealed everything you need to know about Q-Day – including details on my No. 1 stock pick that could explode in the wake of NVIDIA’s announcement.

To check out Louis’ full presentation, click here.

Coming full circle…

So, what are we to conclude from all this?

Here’s the quick-and-dirty:

• Our current drawdown is largely “sentiment” driven. At present, that gives the edge to this being a buying opportunity
• Based on current earnings forecasts, it’s unlikely we’ll devolve into an earnings recession, which would usher in a more damaging bear market
• However, tariff wars could change the calculus depending in their severity and duration
• Focusing on the earnings strength of your specific stocks is the best way to avoid unnecessary stress – or kneejerk decisions – in a market climate such as this one.

We’ll keep you updated.

Have a good evening,

Jeff Remsburg