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S&P Watch: Why the Bear Will Become a Bull


New market leadership must emerge.

I predicted that second-quarter earnings numbers would be coming in above consensus (see Higher Earnings in Coming Months). Thus far, they are. Stocks have reacted positively. The implication is that the above-consensus readings produced in the macroeconomic reports issued over the past several months are being translated into above-consensus readings in the earnings arena.

By delivering on the promise of better-than-expected earnings, companies are signaling that they can produce good growth and profitability in a difficult economic environment.

More significant than the absolute numbers are the expectations that analysts and investors have built into the second-quarter results, what they mean for the full year, and what they mean for the next 12 months.

If bottom-up consensus earnings, which are projected to be approximately $14 for the second quarter (S&P 500 operating earnings), actually come in above that number, then the full-year projection of $55 may be on the low side, thereby justifying stocks at current levels. The implication, however, is even more significant for the next 12 months and into 2010.

If companies can produce above-consensus results in the difficult economic environment of the past quarter, then it stands to reason that, as the economic climate improves (as the Federal Reserve seems to think it will) the next several quarters will also be above current consensus expectations, thereby justifying an even higher stock market.

I have made a great deal of this above-consensus factor over the past several weeks in prior Minyanville articles, on my blog, and in my recent Tech Ticker interview.

Given the stock market's response, so far, so good.

The stock market is predicting that the US economy is in transition (from recession to recovery) while key sectors of the global economy (emerging markets) are in growth-resumption mode.

In the US and other developed economies, this can be seen from a chart perspective and is something that I have also written about on my blog and discussed in a second Tech Ticker segment.

However, the macroeconomic data and second-quarter results operate within the context of a transitional economy and transitional markets (the bumpy road to the new normal, if you will) -- something to which investors should be sensitive.
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No positions in stocks mentioned.
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