The stock market rally is running on fumes as earnings growth can't keep up with sky-high prices, top economist says

• The stock market is primed for a correction as equity valuations hit historically high levels, according to economist David Rosenberg.
• Rosenberg highlighted that a 26% surge in the S&P 500 over the past year is backed up by only a 6% gain in earnings growth.

The stock market is "primed for a correction" as earnings valuations hit historically high levels, according to economist David Rosenberg.

In a series of notes over the past two days, Rosenberg warned that the S&P 500's 26% rally over the past year is running on fumes, as earnings growth has jumped by only 6% over the same time period.

That suggests that the expansion in the S&P 500's forward price-to-earnings valuation multiple to 21x from 18x in October is getting stretched.

"This sort of move over a seven-month span has only happened 5% of the time over the past three decades," Rosenberg said. "Everyone is talking about this being an earnings-driven stock market, but over the past year, it has actually been four parts multiple expansion and one part EPS growth."

Future earnings expectations don't look any better, Rosenberg noted. Wall Street consensus for the S&P 500's 2024 earnings per share is $245, which is the same forecast today as it was in October, before the stock market staged a near-30% rally.

"Not just that, but 2025 earnings forecasts (at $275 currently) since the market took off last October have risen less than +2%!" Rosenberg said.

The surge in equity valuations has led to a crashing equity risk premium, with the S&P 500's earnings yield of 4.8% slightly above the 10-year Treasury yield of about 4.5%.

"The equity risk premium, in other words, has been obliterated. The stock market is so overvalued that when controlling for the level of interest rates, the P/E multiple is more than 30% above where history says it has been in the past," Rosenberg said.

That has informed Rosenberg's consistently bearish view, but the economist did say that high valuations on their own do not mean the stock market can't go higher from here.

"This by no means suggests that the bubble can't get even bigger. But it is to say that this is a huge bubble, exceeded only in the 1999-2000 tech mania," Rosenberg said.