Investors are pricing in a faster pace of U.S. growth, which is a major reason that rising yields across the maturity spectrum have not resulted in a correction in equity valuations.
We expect growth in the third quarter to accelerate to 3.5% with upside risk from 2.2% in the second quarter and then post a healthy 2.4% in the final quarter.
Since April, the 10-year Treasury yield has increased by 92 basis points from 4.31% to 5.23%, while the three-year forward earnings per share compound annual growth rate for the S&P 500 has decelerated from 20.8% to 15.8%.
Put simply, the increase in higher forward earnings growth because of stronger fundamental economic growth is offsetting those higher yields, which has put a floor under valuations as investors reprice growth and risk.
As long as the compound annual growth rate of earnings in the S&P 500 remains in strong double-digit terrain, that repricing of growth and risk should not result in a market correction.
Which implies that third quarter earnings, which kick off this week, as well as the forward guidance in those earnings statements will be the difference between healthy friction driven by the repricing of growth and pronounced market stress.
