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Jeremy Siegel makes sense of why strong earnings are not driving stocks higher (like they should)

Jeremy Siegel makes sense of why strong earnings are not driving stocks higher (like they should)

The stock market is not getting its usual bounce from strong quarterly earnings because it had already priced them in late last year, longtime bull Jeremy Siegel said Wednesday.

Wall Street analysts were slow to recognize the positive impact of the Republican tax cut passed into law last year, the Wharton School finance professor said.

Analysts “undershot it,” but the market didn’t, he said.

“That’s why [the market] went up at the end of 2017. That was the rally,” Siegel told CNBC’s “Squawk on the Street.” “Then, when earnings were good, people thought it should go up again in 2018. That’s double counting. [The market] had already gone up knowing the earnings would be good.”

Wall Street had its best year in four years in 2017, with the Dow Jones industrial average, S&P 500 and Nasdaq all notching all-time highs.

However, stocks were under pressure Wednesday, as investors worried that corporations may not be able to maintain their pace of earnings growth.

Investors were also fretting over interest rates.

Siegel contended that there is “an interest rate problem here,” with the 10-year Treasury yield moving above 3 percent for the first time in more than four years. He expects the 10-year will stay above 3 percent for the long term.

“Earnings are good but it’s all discounted by the denominator and those are the interest rates and they’re going up,” Siegel said. “It’s a battle between which is rising faster — the earnings or the interest rates. And right now … we do have inflationary pressures.”

Additionally, he said, there are political factors that could keep a lid on stock prices, including the November midterm election that could see Democrats taking control of the House.

“What does that mean? Is it trouble for [President Donald] Trump or any of the Republican agenda?” he asked. “Don’t expect another 2017 this year.”

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