Stock Market Is Pricing A Never-Before-Seen 'Divergence' As Equities And Bonds 'Run It Hot' Amid Gloomy Outlook By Bottom-Up Analysts

The financial markets are signaling a remarkably bullish outlook, with both stock and bond markets fully embracing a “run it hot” trade. However, this aggressive market pricing stands in stark contrast to the pessimistic views held by bottom-up analysts, companies, and economists, according to a recent analysis by Bob Elliott, CIO at Unlimited Funds.

What Happened: Elliott, in a detailed X thread, highlights this unprecedented “divergence” which he has “never seen” in his professional career outside of typical cyclical bottoms.

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Following Tuesday’s surge in the equity market, market-based pricing of growth expectations has almost entirely recovered its earlier drop this year, now sitting just a few points off highs.

As highlighted by Elliott, this sentiment is reflected in large-cap 12-month forward price-to-earnings ratios, which are back near all-time highs at 21x.

Concurrently, long-dated real yields have reached their post-COVID cycle highs, and term premiums on closer-in maturities are also approaching their cycle peaks.

Despite this seemingly extreme market optimism, the perspective from professionals analyzing data from the ground up paints a far more subdued picture. Economists are forecasting softer growth for the next couple of years.

Corporate earnings revisions for U.S. large-cap companies have notably collapsed, reaching their weakest point since the COVID-19 pandemic. Global earnings revisions also remain quite subdued, despite a marginal recent uptick in negativity.

Projections for 2025 earnings growth, which are typically skewed positively until just before the period, are currently penciled in at a mere 7%.

Why It Matters: According to Elliott, either bottom-up analysts, scrutinizing incoming data, are taking an excessively pessimistic stance, or they are accurate, implying the markets are “wildly offside.”

For macro investors, he suggests, “making a call on which is right will likely be the make or break trade for the rest of ’25.”

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