The stock market had another very strong week as the Spyder Trust (SPY) is already getting close to the next upside target in the $218-$220 area. Many media traders and investment banks are looking for another weak earnings season but last week's numbers had some positive surprises.
In the next two weeks we will get a better idea but since May I have been looking for better than expected earnings. This is diametrically opposed to Goldman Sachs who commented a week ago that " A worse-than-expected earnings season especially for banks and Apple will cause the S&P 500 to pull back 5 to 10 percent from its current all time high".
NEW YORK, NY - JULY 12: A group of traders talk while working on the floor of the New York Stock Exchange (NYSE), July 12, 2016 in New York City. The Dow Jones industrial average closed at an all-time high. (Photo by Drew Angerer/Getty Images)
The data since 2013 suggests that fundamental analysts have not done well in forecasting earnings. This chart from FactSet shows that the actual earnings (in blue) have consistently been stronger than their estimates. For example, in 2014 earnings were positive but came in stronger than estimated. Over the past five quarters the estimates have been negative but earnings have not been as weak as were estimated.
WA7-15a
This week we have IBM, Bank of America, Goldman Sachs, Johnson & Johnson, Microsoft , United Health , Intel and Starbucks just to mention a few. My favorite earnings calendar is on Morningstar. These stocks and others next week may set the tone for the rest of the earning's season.
Many of the financial pundits and writers spent considerable energy last week trying to explain the new highs in the S&P 500. As was the case the previous week most expressed disbelief or argued why the rally must end soon. It is important for an analyst to keep an open mind when analyzing the markets as failing to continually question your conclusions can lead to disaster.
In last week's column I tried to point out that most of the bearish analysts do not provide any guidelines for what it would take in order to change their outlook. . I think you always need an exit strategy as everyone is wrong at some point. Some comments suggested that some clarification would be helpful.
If you are bearish on the stock market because the price/sales data or margin debt is too high then it would seem that only sharply lower numbers could change the negative outlook. If instead these numbers move even higher how or when does one determine that they were wrong?
|