In early June, Tobias Levkovich, chief U.S. market strategist at Citigroup, forecast that the S&P 500 would reach just 2800 by year end, and “the high 2800s” by mid-year 2019, hampered by rising bond yields and wages. That means the S&P would remain essentially flat for the rest of the year, and gain just a couple of percentage points through next June.

Levkovich’s counterpart at Goldman Sachs delivered a similarly downbeat appraisal in late June. David Kostin predicted that the S&P would finish 2018 at 2850––about where the index stands today––and generate mid-single-digit increases in both 2019 and 2020.

Two distinguished economists warn that far worse may be at hand. In a recent column in the Wall Street Journal, Martin Feldstein, chairman of the council of economic advisers under President Reagan, warned of an imminent “collapse in high asset prices,” led by tumbling equities, which “have risen far above the historical trend,” and now stand “50% higher than their all-time average.”

During an interview on CNBC in June, Yale’s Robert Shiller was cagier, but still reckons that stocks are “overpriced.” Shiller asserts that it’s the surge in optimism under President Trump, rather than fundamental improvements in the economy, that are sustaining lofty equity prices. Shiller fears that the Trumpian magic, and the bull market it produced, may prove ephemeral.

Still, the doubters are outweighed, and generally out-talked on the popular TV business networks, by the bulls. The Bank of America Merrill Lynch Fund Manager Survey for August, a poll of 243 investment pros, found that money managers have suddenly turned bullish on U.S. equities versus international stocks. In a single month, their allocation to the domestic market jumped 10 percentage points from slightly underweight to 19% overweight, the highest levels since early 2015.

To assess whether the historic surge in profits has legs, and what a slowdown would mean for future U.S. stock prices, it’s useful to examine these three questions.

WHY HAVE PROFITS SOARED?

First, let’s explore the anatomy of the profits boom. Naturally, what really counts for investors isn’t total earnings, but earnings-per-share. And the growth in EPS over the past twelve months is nothing short of astounding. According to S&P, “operating” earnings stood at $116 per share at the close of the June quarter last year. With almost all profits reported for Q2 of 2018, the figure stands at $140.4, representing a one-year jump of 21%. (“Operating” earnings include income tax expense and all other costs incurred in running the basic business, but exclude such one-time items as merger expenses.)

According to Howard Silverblatt, senior industry analyst at S&P, two factors drove those gains. “It’s a combination of the corporate tax cut and strong sales growth,” says Silverblatt, “although so far it’s difficult to say how much each of those factors contributed.”

Parsing the numbers shows that a rare confluence of record-high margins and a remarkable jump in revenues nurtured the profit bonanza. From Q2 2012 to Q2 2017, the ratio of operating profits to sales averaged 9.3%. But in the 12 months ending June 30 of this year, that figured soared to 10.9%, by far the highest reading in past decade. U.S. companies also collected those extra-fat margins on soaring sales. From Q2 2016 to Q2 2017, the S&P 500 booked revenues per share of $1186. Over the following 12 months, the figure leaped to $1292, or 8.9%. That’s more than four times the average annual gain from 2012 to 2017.

“Suddenly, people are spending more,” says Silverblatt. “It’s a sign they’re more optimistic about the economy’s future.”

The 14-point reduction in tax rates substantially raised margins. But companies also kept operating with lean labor forces, so that revenues rose a lot faster than costs, even apart from taxes. That formula created a powerful impetus from “operating leverage,” margin expansion created as revenue growth outstrips the rise in expenses.

CAN THE PROFIT BOOM CONTINUE?

The analysts polled by S&P predict that EPS will rise from $140.4 to $168 by mid-year 2019. That’s a 21% increase, and it’s the ballpark number the bulls keep citing as the reason stocks will keep waxing at double-digits.

But to get there, the S&P would need to benefit from a repeat of the two extraordinary forces that propelled prices over the past 12 months. Let’s assume that margins remain flat at 10.9%, keeping in mind that profitability has averaged about one-fifth lower over the past decade. In that case, sales per share would need to rise to $1550, or 20%, in order to deliver EPS of $169. Even if margins hit a never-before-seen 12%, revenues would have to swell by 9%, beating projected growth of the overall economy by four percentage points.

In short, it’s likely that margins will remain above the long-term average because of the tax reductions. Today’s level of nearly 11%, however, is too extraordinary to last. As sales expand, companies will need to add new shifts and more workers, and their financing costs will rise as the Fed continues to raise interest rates.

Investors also should also set their forecasts for revenue growth well below the 9%-plus powerhouse of the past year. As a result, operating leverage will decline. So it would require a near-miracle for earnings jump from these already elevated heights by anything approaching another 21% by June of next year.

HOW FAST ARE PROFITS LIKELY TO GROW? AND WHAT DOES THE PROFIT OUTLOOK MEAN FOR STOCK PRICES?

The Goldman Sachs report from late June offers, by Wall Street standards, an unusually sobering and measured view. And it still may be too optimistic.

Goldman forecasts that EPS will hit $159 for all of 2018, representing a total gain of 19%. But it reckons that since the S&P will end the year at 2850, the big-cap index will deliver gains of just 6.6% for the year, almost all of which it’s delivered already. The reason? At the start of 2018, the multiple of the S&P price per share to trailing EPS stood at 21.4. Kostin of Goldman predicts that the P/E will fall substantially, ending the year at 17.9. The tumbling multiple dictates that U.S. stock prices will rise only one-third as fast as earnings.

For 2019, Goldman adds another downer: An outlook for earnings that’s a lot more modest than the view from analysts polled by S&P. Kostin reckons EPS will end the year at $170, for a 7% increase, well below the consensus forecast of over 11%. But once again, Goldman predicts that equity price gains will trail earnings, waxing at just 5.3%, as the P/E registers a small contraction to just over 17.

For 2020, Goldman calls for an increase for both profits and stock prices of only 5%. The S&P multiple would remain flat at around 17, and equity values would simply rise in lock-step with a matching, 5% increase in EPS.

The Goldman scenario is a valuable roadmap, because it projects that profit growth and multiples won’t repeat their rare feats of the last 12 months, and that both metrics will return to their historical trends. But that prediction begs an crucial question: Are earnings so elevated compared to normal benchmarks such as GDP and revenues that rather than rising modestly from here, they’re actually more likely to fall sharply. That’s essentially the argument Feldstein is making.

So the Goldman case is really the best-case. It’s a mistake to follow the pros by bulking up on U.S. stocks. Our equities are the world’s most expensive. Things will return to either the “good” normal of low-to-mid single digit gains, or the “bad” normal of a steep decline. A bluebird outcome for U.S. stocks is highly improbable. For investors, it’s best to follow the advice of Feldstein’s fellow skeptic Shiller, who recommends lightening up on U.S. stocks and scouring the globe, notably the emerging markets, for places where equities are truly cheap.

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