This Telegraphs A Continued Higher Path For Stocks

Markets came roaring back on Friday.

Why? Liquidity is king. And the Fed and global central banks continue to pump liquidity into the system. So, just that quickly, we have new record highs in stocks again.

Earnings will kick off next week. And the numbers will be big. The S&P 500 earnings growth is expected to come in at 64% growth. That sounds unimaginably huge for an index that represents a broad swath of the market.

Of course, that measures against a very low base of a relatively shut down economy. But I suspect even this massive growth estimate will be crushed when the reports start rolling in next week. That means positive surprises. And positive surprises are fuel for stock prices.

As we know, corporate and Wall Street estimates are made to be beaten. In fact, according to FactSet, analysts typically (i.e. almost always) reduce estimates over the course of a quarter. In the case of this past quarter, they increased estimates as the quarter moved along for the first time since fourth-quarter 2009. Still, safe to assume they have set a low bar.

Higher-than-expected earnings would only drive down the valuation on stocks. At the moment, on current estimates the S&P 500 is trading at 22 times earnings. A higher denominator will move that lower. And remember, in low-rate environments, stocks historically tend to trade north of 20 times earnings. We are in the extreme of low rate environments. This all telegraphs a continued higher path for stocks.

MORE FOR YOU

Get my free daily Pro Perspectives notes delivered to your inbox, here.

Comments are closed.