The S&P’s valuation is frothy … will earnings meet the challenge? … more evidence of “a tale of two markets” … how to sidestep an AI crash The stakes are higher than usual for Q2 earnings season, which unofficially begins this week when the Big Banks report. Here's our hypergrowth expert and the editor of Innovation Investor Luke Lango explaining why: The market is expensive. The S&P 500 is currently trading at 22X forward earnings. That's one of its richest valuations and a whopping 20% above the market's average forward earnings multiple of the past decade (about 18.5X). Considering such a rich valuation, Wall Street needs a strong earnings season to push stocks to even higher highs. Luke believes that corporate America will rise to the challenge. He highlights how Wall Street analysts have been revising their profit estimates higher across the board. This suggests increased confidence that profit trends are improving across the economy. Here in the Digest, we've highlighted how analysts sandbag earnings estimates to make it easier for companies to clear the bar. So, if analysts are revising estimates higher, that's certainly a sign of confidence. Back to Luke for the data behind his optimism: S&P 500 profit growth is expected to steadily improve from about 8% this quarter to over 15% by the summer of 2025. That represents a huge profit growth ramp for the entire market over the next 12 months!  We expect that alongside that impressive growth, the stock market will do quite well. That's exactly why we expect this record-setting market rally to continue for at least the next year. | ADVERTISEMENT  Legendary trader Tom Gentile predicted the rise of Artificial Intelligence more than five years ago and gave his readers a chance to turn $10,000 into…
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He’s now issuing this critical AI warning for the next 30 days. | We’re pleased to see this expectation for heighted profit growth because today’s market valuations need support Luke highlighted that the S&P 500 is priced at 22X forward earnings – a rich valuation. Now, remember the variables that go into the calculation for a stock's price: 1) earnings, and 2) the multiple that investors are willing to pay for those earnings. We just looked at earnings, so what about that investor multiple? When we analyze this variable, we're really looking at sentiment. How excited are investors? Are they bursting with optimism, willing to pay a higher price tag for a certain level of earnings (aka, "greedy")? Or are they glum, only willing to fork over a fraction of the price for the same level of earnings (basically, "fearful")? At face value, investors are "greedy." To illustrate, below, we look at commentary and charts from analyst Charlie Bilello: The market's rapid advance this year has not gone unnoticed, and sentiment is getting frothy again. The percentage of Bulls in the Investors Intelligence survey has moved up to 63%, the highest we've seen since April 2021. This is above 97% of historical readings. 
Meanwhile, Active Managers (NAAIM survey) have gone all-in and then some, with their equity exposure moving north of 100% on average.  Translation – much of this year's record-setting runup in the stock market has come from excited investors who have been willing to "pay up" for earnings. This is part of the reason why the S&P's valuation is so high. Now, there are two ways to bring a lofty valuation down to more average levels: 1) earnings climb to take pressure off valuations, making them appear more reasonable, or 2) stock prices fall as bullish sentiment sours, reflecting investors who accept the reality of relatively lower earnings. Circling back to the opening of today's Digest, this is why the stakes are so high for the earnings season we're about to begin. But what if "greed" isn't the whole story when it comes to sentiment today? | ADVERTISEMENT  Everyone seems focused on Biden getting replaced before election day.
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Click here now to see. | How today’s market can be fearful and greedy at once When we browse the various indicators that make up CNN's Fear & Greed Index, we find something quite interesting… Contradiction. As you can see below, its rating for "Market Momentum" clocks in at "Extreme Greed":  This matches what we just saw from Bilello. However, its reading for "Stock Price Strength" and "Stock Price Breadth" come in at "Extreme Fear":  How do we explain these polar opposite readings occurring in tandem? Regular Digest readers already know the answer… A handful of mega-cap AI/tech plays have surged this year, setting various all-time-highs – resulting in the "Extreme Greed" Momentum reading we just saw… Simultaneously, the average S&P stock hasn't done much of anything, and is, in fact, nowhere near all-time highs. So, today's extreme greed and extreme fear reflect a tale of two stock markets. The question before us today is how this will resolve. Will we see mega-cap stocks fall back in line with the valuation of average stocks, or will average stocks zoom higher to match the valuations of the mega-cap winners? To be clear, neither of these must happen. As we often write in the Digest, the market is not one huge monolith that rises and falls in unison. It's made up of thousands of different stocks that perform well and poorly at different times, for different reasons, and in different market environments. That said, circling back to Luke, he sees a great "catch up" in the works. From his Daily Notes in Innovation Investor: The earnings growth ramp will be most pronounced in the "other guys". The S&P 500 has increasingly bifurcated over the past two years between the Magnificent 7 and the S&P 493 – or the other 493 companies in the S&P 500 that aren't the Magnificent 7 tech titans. Interestingly, over the next four quarters, Mag 7 earnings growth is expected to slow, while S&P 493 earnings growth is expected to meaningfully accelerate. We believe this provides support for the S&P 493 to play catch-up with the Mag 7 over the next 12 months. We'd be thrilled to see it. Now, this does raise one question – how will all these S&P companies produce such fantastic earnings growth without resulting in higher inflation? But that's a question for a different Digest. | ADVERTISEMENT  Wall Street legend has just uncovered one tiny Maryland company that could become the next Nvidia. Few in the media are talking about this story yet… but in the next 6 months that’s all they’ll talk about.
Go here now for this breaking story. | In the meantime, if you’re not sure how to play this “tale of two markets,” you can always let history be your guide In other words, rather than gamble on what you hope will happen, why not look to historical data to see what has already happened – consistently – and let that guide your trading? This is the approach of Tom Gentile, who's the latest addition to our corporate family. Tom is a master trader who's built a multi-decade, multi-million-dollar trading career based on trading historical chart patterns. It's a simple approach, which is why it's so powerful. In short, certain stocks exhibit reliable, repeatable patterns. When you identify them, you simply make a reasonable bet that the pattern will play out again. Here's Tom with more: When I was learning how to trade, I noticed how a handful of stocks had their own seasonal patterns. I'm not talking about seasonal patterns that everyone knows about like "Sell in May and go away." I'm talking about patterns that occur regularly in the best 370 U.S. stocks… every day the markets are open. A tool I've created called the Money Calendar uses 10 years of historic data to spot specific windows – usually 35 days or less – when certain stocks move up or down. What I'm looking for is a bullish or bearish pattern that repeats over the same windows 90% of the time (9 out of the last 10 years). A few illustrations of Tom's wins from this pattern-based trading style include Tesla, that delivered a 60% profit over 40 days… Nvidia, which jumped 23% between January 11 and February 16… and Microsoft, which made traders 20% in 38 days. On Tuesday, Tom held a live event that explained his system in greater detail. He also talked extensively about why he's concerned when he looks at some of the most popular AI stocks in today's market. A few of his favorite, most reliable patterns suggest a painful reckoning is on the way for these AI-high-fliers that resembles the Dot-Com reckoning. So, whether you're interested playing offense (what chart patterns are likely to make me money over the upcoming weeks/months?) or playing defensive (what chart patterns suggest red flags for stocks in my portfolio?), pattern trading is a powerful tool. To watch a free replay of Tom's presentation on Tuesday, just click here. Meanwhile, we'll keep you updated about earnings when things kick off later this week.
Have a good evening, Jeff Remsburg | 
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