Stocks are flashing warning signals of a potential top. With 75% of Q4 earnings in, companies have again fallen short of original estimates—no surprise there. It’s becoming a routine trend. Now, the 2025 earnings projections are facing downward revisions.
The S&P just released their 2026 earnings estimates, and it’s not a pretty sight. Historically, earnings grow at a steady 6% annually, aligning with long-term economic growth. But current estimates are well above what the economy can realistically support. Can the market keep up with these inflated projections? It’s looking increasingly unlikely.
Yesterday saw the second-largest breadth divergence in the last 20 years, signaling major weakness underneath the surface. The largest divergence was in December 2021, right before the bear market hit. The third-largest divergence happened last July, leading into a global crash. The warning signs are getting harder to ignore.
The risk is high, especially with the long weekend ahead. The so-called “Magnificent Seven” stocks might hold their ground, sustaining a normal risk premium with slower earnings growth. But the rest of the S&P 500? They need an earnings acceleration to justify current valuations. In particular, the broader tech sector is facing an uphill battle. It needs to grow at more than triple its past pace just to stay afloat.
As government spending continues to surge (a near-record $642 billion spent in January), it’s clear that the government is doing everything it can to prop things up. But here’s the kicker: if government spending and hiring are the only things keeping us from an official recession, then we’re already in one. In the last 12 months, the government has spent a staggering $7.1 trillion—32% more than in 2019. Federal government spending has doubled in just 10 years, and it’s running unchecked.
Meanwhile, the S&P 500’s dividend yield sits at its second-lowest level in modern history. What could possibly go wrong?
In sum, the stock market is on the edge, poised at a potential topping. Earnings forecasts are unsustainable, government spending is through the roof, and the broader market faces serious growth challenges.
This isn’t just a dip—this could be the beginning of something far more unsettling. Stay alert.
Sources:
https://x.com/LanceRoberts/status/1890381316278960372
https://x.com/LanceRoberts/status/1890386165208879547
https://x.com/SuburbanDrone/status/1890397616812282018
https://x.com/LanceRoberts/status/1890372770732859625
https://x.com/his_eminence_j/status/1890100000719532543
