Sunday, October 16, 2011

Upcoming Earnings Reports and the Stock Market Rebound

This week there will be numerous quarterly earnings reports by leading companies.  As usual, expectations will be crucial in determining how the stock market performs in response.  While I expect the market rebound to continue for a bit longer at least, expectations for corporate earnings are disturbingly high.

Consensus forecasts for S & P 500 earnings over the next twelve months reflect a 16% gain.  Back to 1979, when forecasted earnings growth was at least 14%, the S & P 500 had negative returns.  In contrast--and not surprising---when forecasted growth was only 4% or less, the annualized return on the S & P 500 was 17%.  When earnings forecasts for the coming twelve months were negative, significant market bottoms typically occurred (in March, 2009 notably).

So while I'd continue to ride the rebound in  a stock market that is probably fairly to slightly undervalued, I'd be sure to have significant cash on hand for the weeks ahead for when the majority of stocks again become significantly undervalued.

Steve Lehman

S & P 500:  1225

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