While stock market valuations are down from their peak in 2018, they are still too high for some observers, especially given that corporate earnings are now expected to grow at significantly lower rates. "The market is likely to be dead money in the next few months," according to Alec Young, managing director of global markets research at FTSE Russell, in remarks to CNBC. "How are you going to get the S&P through 2,900 unless you can get earnings up a lot more?" he added.

The forward P/E ratio for the S&P 500 Index (SPX) is almost 16 times projected 2019 earnings, compared to a range of 17 times to 18 times that persisted at several times in 2018, CNBC notes. However, consensus estimates of earnings growth in 2019 have dropped from about 10% to 5.3% in the interim, per data from the Refinitiv division of Thomson Reuters cited by CNBC. Worse yet, many analysts expect either no growth or an earnings recession in which profits fall in at least two consecutive quarters.

 The 2019 Stock Rally

(Gains YTD through Jan. 31, 2019)

Source: Yahoo Finance

Significance for Investors

The forward P/E for the S&P 500 had sunk to a value 13.3 times projected earnings in early December, its lowest level in five years, per The Wall Street Journal. The subsequent rebound to 16 times worries some observers. They believe that this reflects an unduly upbeat outlook against a background of rapidly diminishing earnings growth and a number of macro risks, such as the unresolved trade tensions between the U.S. and China and the budgetary impasse in Washington.

Among the worrisome indicators, most companies appear to be lowering their earnings guidance for 2019, observes CNBC correspondent Bob Pisani. He cites three other negative trends.

First, among the fourth quarter 2018 earnings reports released so far, the number of companies beating revenue and profit estimates is below the long term averages.

Second, the average year-over-year (YOY) earnings growth rate has dropped in half from the third to the fourth quarter of 2018, from 28% to 14%.

Third, projected earnings growth for full year 2019 has been falling precipitously, from 10.2% in early Oct. 2018, to 7.3% at the start of Jan. 2019, to 5.6% as of Jan. 29, per Refinitiv. By Jan. 31, this figure had dropped yet further, to 5.3%.

Michael Wilson, the chief equity strategist at Morgan Stanley, has been voicing his own concerns about rapidly decelerating profits, as detailed in a previous article. He sees EPS growth going as low as 1.3% in the first three quarters of 2019, and thus advises investors to abandon stocks right now.

In early December, a Goldman Sachs report warned that "S&P 500 valuation is stretched relative to history." They looked at nine different stock market valuation metrics and found that seven of them were giving higher readings than 75% to 98% of the observations made since 1976.

Looking Ahead

It should come as no surprise that opinion is divided on the future direction of the market. For example, despite warning in early December that valuations were "stretched," Goldman Sachs nonetheless still predicts gains in 2019, and indicates that U.S. stocks are the most attractive worldwide, per a recent report.