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Why An Expensive Stock Market Can Get More Expensive

Investors have had plenty to be thankful for this year.

Editor’s Note: Below is a complimentary edition of today’s Early Look—Hedgeye CEO Keith McCullough’s morning market newsletter for investors. Click here to learn more.

“When you rise in the morning, give thanks for the light, for your life, and for your strength.”

If that isn’t a great way to think about how to start your day, I don’t know what is.

I, for one, am very thankful for all that I have in my life. I’m especially thankful for the health and happiness of both my family and firm. I realize these aren’t perpetuities in life. I don’t know what I’d do without them.

I’m also thankful for yesterday’s trifecta of all-time highs (the Nasdaq, S&P 500, and Russell 2000) in the US stock market!

Back to the Global Macro Grind…

All-time, as we like to say @Hedgeye, is a long-time. After plenty of pre turkey-day-mainstream-media-constipation about “tops being in” last week, here are your freshly squeezed all-time closing highs from yesterday:

  1. Nasdaq = 6862 = +27.5% YTD
  2. SP500 = 2599 = +16.1% YTD
  3. Russell 2000 = 1518 = +11.9% YTD

As you know, our favorite way to express both US GDP and Profit #GrowthAccelerating in 2017 has been via the US Tech Sector. The Tech ETF (XLK) led SP500 Sector Style gainers again yesterday closing up another +1.1% at an eye-popping +32.9% YTD.

In other words, an “expensive” macro exposure continued to get more expensive.

Tech earnings have #accelerated so fast in Q317 that it’s been hard to keep up with the “multiple.” You see, when the E in the P/E, ramps +25% year-over-year, that magic multiple that bears are looking for as a negative market catalyst continues to be a moving target.

When considering the causal factors behind this year’s epic Tech returns, here are 3 of the bigger ones:

  • A) The absolute rate of change in earnings growth
  • B) The relative rate of change in earnings growth
  • C) The “beat” rate on both an absolute and relative basis

Let’s wrap some not so “soft data” points around these now hard coded historical realities:

  • A) 62 of 68 Tech companies in the SP500 have reported aggregate (year-over-year) EPS growth of +24.8% in Q317
  • B) 485 of 500 SP500 companies have reported aggregate (year-over-year) EPS growth of +7.0% in Q317
  • C) The “beat earnings expectations” rate for 62 Tech companies has been +11.3% vs. the 5yr average of +4.1%

As you can see in today’s Chart of the Day, Tech’s relative “beat” rate vs. the market is as high as the Nasdaq’s relative return to the SP500. If only the one… and I mean just one… 2017 US stock market bear had this profit cycle #acceleration in their bear case…

Being from Thunder Bay, Ontario, I am thankful for bears. They are as critical to our northern life’s ecosystem as I’ve found bulls to be down here closer to Wall Street. Bulls and bears are what makes a market.

I am also thankful for yesterday’s immediate-term #overbought signal @Hedgeye in the S&P500 (SPY). No one ever went broke booking gains. And Thanksgiving is a lot easier to celebrate not having to worry about what the market does on a no-volume Black Friday.

From my American side of my family and firm to yours, Happy Thanksgiving!

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:

UST 10yr Yield 2.31-2.42% (bullish)
SPX 2572-2604 (bullish)
RUT 1488-1526 (bullish)
NASDAQ 6715-6884 (bullish)
VIX 9.29-13.01 (bearish)
Oil (WTI) 55.13-57.99 (bullish)
Gold 1265-1290 (bearish)

Best of luck out there today,

By Keith McCullough, the Founder and CEO of Hedgeye Risk Management. Try our new product ETF Pro (no strings attached) for one month free. Click here to get it.

As the markets put the debt ceiling debacle in the rearview mirror, more than a few issues remain open.