The stock market has recently witnessed a remarkable surge, fueled by a phenomenon known as “FOMO”—the fear of missing out. Investors have been eager to maintain or increase their equity positions, spurred by the anticipation of greater returns. However, Ed Yardeni from Yardeni Research has introduced an intriguing concept to explain the current market dynamics: “FEMO,” which stands for “fabulous earnings momentum.” This shift highlights a focus on robust earnings growth that analysts are struggling to keep up with in terms of projections.
The Role of FEMO in Market Growth
Yardeni emphasizes that this year has been characterized by strong earnings momentum, which he believes is the primary driver behind stock price increases. Specifically, forward earnings estimates for the S&P 500 have surged by 14.4%, setting new records. In contrast, the average price-to-earnings (P/E) ratio has decreased by 4.6%, even as the S&P 500 has increased more than 9%, reaching all-time highs. Ultimately, the health of the stock market boils down to one critical question: Are earnings on the rise or in decline? Despite external factors such as fluctuating oil prices, the prevailing sentiment among investors is that expectations for profit growth remain high, encouraging ongoing stock purchases.
Market Fundamentals and Earnings Outlook
“The entire rally has been driven by forward earnings,” Yardeni continued, noting that while FOMO can inflate the P/E ratio, the current market is demonstrating a different trend. Market fundamentals appear to be solid, with analysts predicting significant growth—a staggering 21% or more increase in S&P 500 earnings for the upcoming second, third, and fourth quarters. If these projections come to fruition, overall profit growth for 2026 could reach 22.1% compared to the previous year. This optimistic outlook exists even as the S&P 500 has only gained 9% this year, underscoring the strength of underlying fundamentals.
Causal Relationships in Market Performance
Notably, Adam Parker, founder of Trivariate Research, has pointed out that, for the most part, market performance has remained closely linked to fundamental economic factors at both the market and sector level. Despite this, it is essential to acknowledge that broader macroeconomic influences, like international conflicts, continue to play a role in shaping market sentiment. For instance, the S&P 500 quietly achieved its eighth consecutive winning week, largely buoyed by hopes of a resolution to the U.S.-Iran situation. Following a holiday closure for Memorial Day, U.S. equity markets further advanced when President Trump indicated that negotiations were progressing positively.
The Key Takeaway: Investors’ Focus on Earnings
In summary, while fear of missing out has driven investor behavior for some time, it is the robust earnings momentum—FEMO—that has emerged as the key underlying force propelling the market forward. With analysts struggling to keep pace with rising earnings forecasts, investor confidence has remained strong, leading to increased purchasing activities despite other market uncertainties. As we look ahead, the relationship between earnings growth and stock market performance will continue to be a focal point for investors seeking sustainable growth. The prevailing sentiment is that as long as earnings growth remains consistent, the desire to invest will likely continue, underscoring the importance of monitoring these earnings trends in the months to come.