By Mark Hulbert

Spiking S&P 500 profits often signal the final innings of a bull market. History says stocks are on thin ice.

Wall Street is mistaken to insist that the bull market can't be in danger because corporate earnings are growing fast. Blistering earnings growth of the kind that S&P 500 SPX companies have been reporting lately doesn't keep the bears away.

The opposite is more likely: Sky-high earnings growth rates often are seen near the end of bull markets.

FactSet estimates, based on earnings reports from 94% of S&P 500 companies, that the year-over-year growth rate for the S&P 500's EPS will be 28.4% for the first quarter of this year. That's the highest growth rate since the fourth quarter of 2021.

Recall that the 2022 bear market began the next month. Another ominous parallel comes from the top of the internet bubble in March 2000. That month, year-over-year EPS growth was 32.8%.

These are just two data points, but they are consistent with the historical pattern, as you can see in the above chart, which comes from Ned Davis Research. The S&P 500 has produced the best average return in quarters when the index's EPS ranged between 10% and 25% lower than a year prior. Average returns during quarters of greater-than-20% growth were barely positive, and well below average.

This analysis suggests that the S&P 500 will be skating on thin ice over the next few quarters. FactSet says the analyst consensus is for year-over-year earnings growth to be above 20% in each of the next three quarters.

Many investors are surprised by the inverse correlation between growth rates in earnings and the S&P 500. But it makes sense, given that the stock market is forward-looking. At the end of recessions, for example, forward-looking investors will be anticipating the economy's subsequent recovery. So the market will rally off its bear-market lows even as trailing EPS growth rates are awful.

Something similar happens near the end of economic expansions, though in reverse, as the market recognizes that trees don't grow to the sky.

Keep this in mind as you review the table below of valuation indicators. Many bulls object to these indicators' message on the grounds that the market's high levels are supported by robust corporate earnings. That's false comfort, given the analysis presented in this column.

Each of the indicators in the table was chosen because of statistically significant track records in predicting the S&P 500's real total return over the subsequent decade. The three columns on the right side of the chart report where each indicator stands relative to its historical distribution. A 100% reading means the indicator is sending a more bearish signal than 100% of comparable past readings. The average of the readings in the table below is 99%.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More: These underdogs are a big reason why S&P 500 profit growth is the fastest in nearly 5 years

Also read: This bond strategy can protect your portfolio even if interest rates go up

-Mark Hulbert

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