Earnings season has been overwhelmingly positive so far. Only 16% of the S&P 500 companies that have reported so far has missed expectations. 75% have beaten expectations. That’s what happens when earnings estimates are so low that they are virtually impossible not to beat.
But what’s happening now is very interesting…
Analysts are raising their earnings estimates considerably. Bloomberg reports that forward revisions to estimates now put the forward P/E of the S&P 500 at 13.13. That’s 26% below the 50-year average 16.54.
So are we due for a 26% rally as stocks return to their historical norms?
*****If earnings season finishes with 75% of the S&P 500 exceeding expectations, that would be a record. Since 1933, no more than 72% of the S&P 500 has beaten earnings expectations.
But Bloomberg also reports that just half of the S&P 500 companies that have reported have beaten revenue expectations. That means much of the earnings surprises we’ve seen are a product of cost-cutting and not rising revenues.
To the bears, this suggests there is still risk for stock prices.
*****To the bulls, it’s now clear that pessimism went way too far. Stocks were priced way too low for a disaster that never materialized. More and more strategist-types are coming out and saying things like the economy is stronger than the numbers show and that a V-shaped recovery is underway.
Some economists are even raising their 3rd quarter GDP estimates.
Federal Reserve Chief Ben Bernanke states that the economy will be in stronger footing. And this is an interesting point. Overinvestment in real estate is being written off and prices are falling to levels that make sense for the family budget and the business bottom line. Increased regulation will keep investors’ money safer (we hope). Increased savings will put consumers on stronger footing.
In essence, the U.S. economy will, at some point, start growing from a much lower baseline. And while the stock market may only recover the gains it lost over the last two years, that recovery process would lead to some phenomenal gains from current levels.
*****The question for me is: when? I can’t help but think that analysts may be overshooting on the upside, just as they overshot on the downside. And I’m pretty sure I’m not the only one who feels this way. Consider that existing home sales jumped 11% in June, and yet stocks are in the red so far today.
There can be no doubt that such a jump in home sales is unexpected good news. But stocks are ignoring it. I say that’s because there’s a lot of good news priced in already.
*****So I may be cautious, but I’m going to do what I have been: buy quality stocks, watch them closely and take profits. That approach has been working great so far this year…
*****TradeMaster Daily Stock Alerts readers just took another 19% gain on MYR Group (Nasdaq:MYRG). Nice work, Jason. If you missed Jason’s video chart analysis from Friday, you can check it out HERE.
*****Now let’s have a look at the economic data for the week.
Tomorrow, Tuesday, June 28, we get the Case-Shiller Home Price Index and Consumer Confidence numbers. Wednesday, it’s Durable Goods and Oil Inventories. Jobless Claims are out on Thursday.
Friday is the big one, with the release of Second Quarter GDP. This should be a major market mover.