My theory is that barring some disaster, you’ll see top-line revenue growth in Q3 or Q4 as the 85% +/- of fully employed workers finally calm down to start spending and the financials start expanding credit in order to generate earnings, the combination of which will provide a real momentary pop. But that pop would probably be followed by a jobless recovery, which leads to a “now what?” market response thereafter, leading to a choppy plateau that might be better for corporate bonds and for day trading than for buy-and-hold equities.

Yet despite the upside forecast, there is also still enough room for disaster that you can’t just throw caution to the wind and disregard the odds of some horrible string of events that result in economic conditions that deny them the revenue growth and inspire more cutting.

Hence, my own personal mildly bullish but neutral stance. The world is not ending. There are some people who are heavily invested in the Apocalypse mentality for personal and psychological reasons, and we would be best to avoid listening to them — their voices are currently far too trendy for their own good, enough to make any good contrarian nervous. TPC here seems to keep a level head, and as far as I can tell, he’s often on the right track.

I think that if S&P 500 quarterly operating earnings continue at about $10 to $11 and as reported earnings don’t improve quickly from the $7 to $8 level, then 700 or so on the S&P 500 (6,500 on the DOW) is an appropriate level. Stagnation following the collapse. Lower multiple.

On the other hand, if sales and earnings get back to the $14-$16 dollar range and as reported earnings follow, then the S&P500 could easily trade at 1,200 in short order on optimism that the upward trend will continue. Rapid recovery and higher multiple.

I agree that the most probable scenario is somewhere in the middle.

Earnings and valuation clearly do matter, but no one has a good overall handle on what earnings will be this quarter or in future quarters. There are simply too many unknown variables. Even Government Sachs said that the economy is a wild card (or weak leg or something like that) in their revised forecast of S&P 500 at 1,060 for year-end.

I think what you’re seeing are numbers that aren’t good enough to justify Dow 12,000, but ensure that it also isn’t justifiable to value it at Dow 7000, either. Not bull, not bear, but something else.

I would suggest that what we’re seeing is neither a bear market rally (which would imply that the market should be far below this and that S&P 666 was somehow rational or optimistic) nor a bull market rally (the beginning of the beginning), but a correction of this spring’s massive overcorrection to the place where the market would have gone in the first place had it not been for a few extraordinary events that shocked the markets.

I would offer a SWAG that the current trading band may be the new normal, and that a few specific events, most notably Lehman, the last days of old GM, and Geithner’s poorly phrased comments last spring about the dollar’s reserve status, are what led to things being temporarily worse. Those spring lows were buying opportunities, and barring some disastrous news to the contrary, those are probably not levels that we’ll be seeing again.

If you buy that theory as I see it, then hedge your downside with stop losses, but don’t be too aggressive and look for specific sectors and cycles to trade, instead of focusing on too many long-term holds or a general bull/bear index strategy. The neutrality play is a good one, in my opinion; things may turn out over the medium run to be choppy, and not easily or accurately described by the usual animals.

In Q1, earnings for the S&P500 as a whole came in at $10.11 which was 25.5% below the $13.39 bottom up estimate. They also came in below the top-down estimate which S&P publishes. Nevertheless, most companies beat the estimates reported in the media. Strange. Many Q2 estimates set below Q1 2009, but the bottom up forecast is for a 30%+ increase in earnings versus Q1 2009. The highest quarter to quarter S&P500 earnings growth since 1988 was 12.5% with the exception of Q4 2008 (when earnings were negative) to Q1 2009.

TPC regarding AAPL,

I was not very impressed with Apple’s earnings. Bottom line growth versus Q1 2009 was less than top line growth (margins did not improve versus last quarter). Sales were only up 2.2% versus Q1. Apple is a premier company. A high “growth”, high multiple company. The revenue growth was good by normal standards, but not by Apple standards. Maybe good for the new normal.

Apple’s revenue growth from 2006 to 2007 was 24% and 2007 to 2008 growth was 35%. Y-o-Y growth of 9% in Q1 209 and 12% in Q2 2009 is in comparison quite low. Apple is a great company but growth is no longer what is used to be. The multiple it trades at assumes that 2006-2008 growth levels will come back in the near future.

The whole stock market trades as if growth will be returning soon. The stock markets around the world have declared the recession over. But then again the stock markets predicted that there would be no recession as they rose to new highs in October 2007.

Revenues are up 12% versus prior year. Last quarter they were up 9% versus prior year so the rate of increase is improving somewhat. On the other hand, sales were only up 2.2% versus Q1 2009 and that with a weaker USD versus Q1. Did sales increase at all over Q1 excluding currency translation? After all the green shoots no big sales increase for America’s premier cutting edge tech company? Shocking.

Profits over grew 1.5% versus Q1 2009. Margins seem to be flat to a little bit down versus Q1 2009. Pricing power doesn’t appear to be improving much even for a company with a cult following like Apple.

P.S. Sorry that my table above is difficult to read. The spaces between the columns went missing when I posted my comments.