Few market commentators have managed to explain how stocks managed that sudden leap after yesterday’s overheated inflation numbers, only to give that gain back today. What I’m seeing is Wall Street finally weighing the COVID years and getting back to work.

Think back to the end of 2019, even before the pandemic emerged at all. At the time, stocks looked stretched and we were already braced for slight year-over-year earnings contraction.

The market, in other words, had hit a wall. And when the virus shut down the global economy, it only gave us new things to worry about. The fundamentals took a back seat to survival.

And then the Fed created the ultimate distraction by flooding the world with cash. Now the pandemic is officially over and that cash is being pulled back out of the market, we’re roughly back in the situation we faced at the end of 2019.

There are just a few differences. For one, inflation has come back to life, forcing the Fed to lift interest rates more aggressively than they did in 2018 and 2019.

For another, companies in the S&P 500 have had three years to expand their business. They’ve earned 28% more profit in the past year than they did back in 2019.

You know the law of evaluating stocks. More profit generally justifies higher stock prices. With that much more profit on the table, stocks have a right to trade higher than they did three years ago.

And that’s what’s holding the market up lately. Because while the Fed is getting aggressive, the outlook looks about the same as it did the last time earnings growth stalled . . . before the pandemic emerged.

The biggest thing that’s really changed in the last three years is that fear has replaced confidence when it comes to interpreting the fundamentals. But over time, that pendulum will swing back in the other direction and investors who buy at these levels stand a pretty good chance of being rewarded.

It Always Comes Back To The Math

Here’s how the math works out. Back in late 2019, the S&P 500 was racing above the 3,300-point summit even though earnings growth looked ready to pause for at least a quarter or two.

I estimate that the big benchmark could boast about $163 per share in full-year profit at that point. We’re looking at trailing numbers here . . . no analyst magic or projection, just the actual cash reported on the books.

As of today, the same calculations point to about $209 per share in trailing profit over the past year. Yes, that means Corporate America has made tangible progress since the end of 2019. This isn’t just the Fed’s mirage distorting all the comparisons, first in one direction and then in the other.

Admittedly, the market is still 7% higher than it was going into the pandemic. But against the backdrop of recent earnings growth, stocks are now significantly cheaper than they were three years ago.

The same people who paid 20X trailing earnings for the S&P 500 in late 2019 are now selling at a 17X trailing multiple. Growth has simply raced ahead of end-to-end stock prices.

We can argue over exactly how much every $1 in profit is worth in an environment where the Fed is pushing interest rates month after month, but it’s intuitively clear that all the earnings growth from the pandemic years has to be worth something.

Throwing out that growth entirely doesn’t make sense. These companies are now collectively bigger than they were then. The stocks should be bigger as well.

And I think that’s what’s going on now as the market struggles to find a bottom. Yesterday’s low took the S&P 500 unnervingly close to the pre-pandemic peak.

Going beyond that level forces the bears to argue that these companies somehow deserve to be smaller than they were in the pre-pandemic era. That’s not an argument that really flies.

It applies to other segments of the market as well. The NASDAQ was barely 9% above its pre-pandemic peak yesterday before it rebounded. We all know those stocks can get overvalued, but they’ve definitely grown more than 3% a year throughout the COVID era.

My beloved small stocks on the Russell 2000 dipped below their pre-COVID peak before bouncing. It’s been a rough three years for many of them, but you can’t convincingly argue that they’ll remain depressed on a fundamental basis.

After all, stocks may have been frothy three years ago. I’d agree with that. At 18.6X projected earnings, they were priced for perfection and not a pandemic.

But expectations looked a lot like they do now. CEOs will keep doing what they’re doing. They’ll adjust to shifting economic conditions and make sure the cash keeps flowing.

I wouldn’t be surprised if earnings growth in the next three years clocks in at something close to 7-9% compounded. That’s roughly what these same executives achieved in one of the wildest three-year periods in living memory.

In that scenario, stocks are going up between now and 2025. They’re really our only refuge against inflation right now as it is.

The only question is how fast they rebound and how far they go. We’ve now largely answered the more immediate question of how low they go in the meantime.