It's the Earnings, Stupid!
Source: Bloomberg and Todd Asset Management
In the current stock market cycle stock prices have become disconnected from fundamentals (see our quarterly review article, Disconnected). What would it take for a reconnection? As Bill Clinton would imply... "It's the earnings, stupid!"
Earnings recessions are periods when S&P earnings roll over and decline on a year over year basis. The three most recent declines are circled above. While often accompanied by economic recessions, they don't have to be. We think the current earnings recession has run its course.
The strength of the dollar and a decline in oil related capital spending are the primary culprits for this earnings decline. Both of those factors began over a year ago, so their negative impacts should be minimal going forward.
Analysts estimate earnings should grow from the current annual rate of $107 for the S&P 500 to $117 by year end and higher over the following two years. We think earnings growth would likely make fundamentals matter again.
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