This chart shows how 2019’s monster stock market comeback is not driven by fundamentals

Source: Deutsche Bank

The S&P 500’s more than 18 percent rally from its Christmas Eve low is hard to explain from a fundamental standpoint, according to some on Wall Street.

Stocks’ monster comeback coincided with a wave of downward growth and earnings revisions from Wall Street. In fact, while the S&P 500 comes roaring back, first-quarter earnings growth forecast for the S&P 500 firms has turned negative, a drastic cut from above 3 percent growth seen in late December. Consensus first-quarter GDP growth has also been slashed to below 2 percent.

“Either markets have to come down to where growth expectations are, or growth and earnings expectations have to move higher to justify current market valuations,” said Torsten Slok, Deutsche Bank’s chief international economist, in a note on Tuesday.

After the worst December since the Great Depression, the S&P 500 enjoyed its best January in more than 30 years and is set to finish February on a strong note. Many have credited the market driver to the growing optimism toward a trade deal with China and the Federal Reserve’s more “patient” approach to tightening. However, growth expectations have not kept up with the market rebound and some economic indicators are pointing to more weakness going forward.

“An alternative interpretation is that the stock market sell-off in Q4 pushed down GDP expectations. And with markets having rebounded we should soon begin to see economic indicators rebound. That is, however, not what we see so far,” Slok said.

“The regional manufacturing surveys for February continue to point to some downside risks to the economic data,” he added.