Santoli: S&P Record Rally May Rest on Shaky Earnings
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- S&P 500 has surged more than 6% in 12 trading days since late July to fresh records, driven by what Santoli calls a 'Subtraction of All Fears' rally: strong hyperscaler cloud growth, a semi rebound recouping less than half of their 30% five-week collapse, and cooling expectations for Fed rate hikes.
- Earnings bonanza may be inflated by companies 'over-earning,' with results flattered by markups of tech giants' stakes in OpenAI and Anthropic, booked revenue from data-center buildouts against which expenses will be recognized in future quarters, a one-time energy-sector surge on wartime supply interruptions, and easy comps from 'Liberation Day' chaos in Q2 2025.
- Valuation has compressed from 23x forward earnings last October to roughly 20x now, and the S&P industrial sector trades at 25x P/E — the highest of this century outside the COVID profit crash — limiting room for further multiple expansion given AI competition and the asset-heavy nature of tech businesses.
- John Kolovos of Macro Risk Advisors expects the S&P 500 can 'thread the needle' to 8,300 (up 6-7%) by early next year with late-summer chop, while Scott Rubner of Citadel Securities sees a constructive August setup from retail rebuilding exposure, systematic funds, and corporate buybacks — but warns September seasonality gets harder.
- Warren Pies of 3Fourteen Research has cut equities to neutral after a 10% S&P 500 gain since flipping overweight in mid-April, arguing the market is pricing a possible Fed rate hike too low.
- BCA Research chief economist Martin Barnes argues soaring federal debt, a resilient dollar, and record corporate profit margins are unsustainable, predicting bond vigilantes will return, the dollar will weaken substantially, and the 'AI-driven bubble in profit margins' may burst within the next year.
Why it matters: If Santoli is right that Q2's earnings beat was padded by paper gains on OpenAI/Anthropic stakes and revenue that won't be matched by expenses, the multiple compression from 23x to 20x P/E has masked deteriorating fundamentals — meaning retail investors rushing back in at record highs (per Rubner's flow data) are buying the illusion, not the substance.
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