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The S&P 500 ramped higher by 13.4 per cent in the past six months driven primarily by economic optimism. U.S. equities are, however, now expensive by virtually every measure, which means that this optimism will be verified during the upcoming earnings season or investors will pay the price through sharply lower markets.

Jeffrey Gundlach, founder of DoubleLine Capital LP and portfolio manager named "the king of bonds" by Barron's, noted his belief that high valuations make equity markets "vulnerable" to a significant correction. He presented the accompanying chart to support this claim to illustrate that the recent move higher was not justified by earnings growth. In addition, the current the S&P 500 trailing price earnings ratio of 21 times is well above the 10-year average of 16.9 times earnings.

Merrill Lynch chief quantitative strategist Savita Subramanian is arguably the most respected earnings forecaster on Wall Street. Ms. Subramanian is constructive on profit growth for the upcoming earnings season, predicting energy and financial stocks will drive overall year-over-year profit quarterly growth of 4 per cent.

(Ms. Subramanian's estimates use a different methodology than the one used in the chart. Rather than comparing trailing 12 months of earnings as of December, 2016, and December, 2015, as the chart does, she is dividing her earnings expectations for the fourth quarter of 2016 by earnings per share in the fourth quarter of 2015.)

The strategist believes that improved corporate guidance on earnings will help support stock prices at current levels, writing, "the market will likely shrug off" slower profit growth than the third quarter rate of 5 per cent "if guidance stays upbeat."

The lower chart highlights the rarity of U.S. market sectors expected to generate significant year-over-year earnings growth. Financials and utilities are the only two market sectors expected to exceed 10-per-cent expansion and even technology stocks' expected growth is a lacklustre 7.3 per cent, year over year.

The S&P 500 industrials index is the one to watch, in my opinion. Riding economic optimism, this cyclical market sector climbed 8.1 per cent in the fourth quarter of 2016. At the same time, however, year-over-year earnings in the industry are forecast to have fallen by 6.5 per cent for the period. It will take extremely bullish corporate profit guidance to keep industrial stock prices at current levels given the significant earnings decline. The sector is also not cheap – the trailing price-to-earnings ratio of 19.5 is only moderately below the S&P 500 average.

This is a "do or die" reporting season for U.S. equities. Valuation levels are high and an improvement in earnings growth, or at least the profit outlook for 2017, will likely prove necessary to prevent a short-term correction in stock prices.