"Europe looks as bad as we thought it would, but our US economic outlook was too optimistic" is how JPMorgan's Michael Cembalest describes the recent environment (adding that US equities have stayed relatively stable thanks to resilient corporate profits and a ton of liquidity). However, with negative pre-announcements mounting (and corporate cash piles startiong to burn a little), we suspect the unusual disconnect between profits and economics will end soon enough. As the following two charts show, when US economic data has been generally sub-par (as exemplified by the plunge in Citigroup's economic surprise indicator), US equities have deteriorated notably in the past. For now, it appears there is a 15-20% disconnect in the S&P' 500's performance relative to the real economy's performance - and the current 'hope' gap looks extremely similar to last summer's before reality set in.
Compare this year's dislocation between the economy (red) and the S&P 500 (blue) to last year's...
It would seem empirically at least that this hope-to-reality gap is around 15-20% in the S&P 500 - among the largest on record.
Either we are about to see a surge in economic data back to positive surprises or the S&P 500 faces a rude reality.