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(Photo courtesy of Getty Images/Spencer Platt)
courtesy of Getty Images
On Friday, the markets exploded back to life. Why? Liquidity reigns supreme. The Fed and other central banks across the world continue to inject cash into the system. So, in a flash, we’ve reached new highs in the stock market.
Earnings will begin the next week. And the figures will be significant. Earnings growth for the S&P 500 is predicted to be 64 percent. That seems unfathomably large for an index that covers such a large portion of the market.
Of course, this is based on a very low baseline of a largely shut-down economy. However, I believe that when the data start coming in next week, even this gigantic increase projection will be shattered. That means there will be some pleasant surprises. Positive surprises, on the other hand, provide a boost to stock values.
Corporate and Wall Street estimates, as we all know, are designed to be beaten. According to FactSet, analysts usually invariably (but not always) lower their estimates throughout the course of a quarter. For the first time since fourth-quarter 2009, they increased estimates as the quarter progressed in this past quarter. Nonetheless, it’s safe to presume they’ve set a low bar.
Earnings that are higher than projected will only lower stock prices. The S&P 500 is currently trading at 22 times earnings, according to current expectations. The lower the denominator, the lower the result. Also keep in mind that in low-rate settings, stocks have a history of trading for more than 20 times earnings. We’re in one of the lowest-rate environments on the planet. All of this points to stocks continuing to rise.
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