However, forward-looking investors don't wait for the deliberative process to play out; they act in anticipation of it. Hence, higher current stock prices. But are these anticipatory actions justified? For that, consider the following final fundamental step in the investment-strategy process.

At present, consensus operating earnings forecasts for the S&P 500, be they top-down or bottom-up derived, are averaging around the mid $50 range for 2009, which includes the next 6 months - the typically quoted future time period stocks discount. However, stocks are a discounting mechanism that often incorporate time periods beyond the next 6 months, especially at prospective economic turning periods. Therefore, the next 12 months may be a more relevant future time period that investors should be factoring in.

There are 2 ways to approach where earnings are likely to be over the next 12 months. One is your standard method: Make a forecast. The other: Let the market do the predicting for you, and then decide if that prediction makes sense.

On this basis (and taking today’s prices), the market appears to be predicting that over the next 12 months, S&P 500 operating earnings will be more like $70 (and not somewhere in the mid $50s). This is derived in the following manner:

1. Current stock-market level = 940

2. 12 months ahead future market level = 1052 (940 x the historical return for large-cap stocks of 12%)

3. S&P 500 operating earnings 12 months from now (mid 2010) = $70 (1052 divided by historical average P/E of 15)

Investment Strategy Implications

Given this data, investors are now free to conclude whether they agree or disagree with these numbers. Do they make sense? Using the macroeconomic predictive process described above, what investors won’t have to do is rely solely on a “sense” of where the economy (and therefore stocks) are headed.