THE EXPECTATION RATIO CONTINUES TO DECLINE
Our proprietary expectation ratio continues to decline despite remaining at rather robust levels. The ratio measures a number of different financial statement indicators and compares them to current and future expectations. Thus, the ratio is not simply a backward or forward looking indicator, but an intuitive and predictive indicator. By comparing actual income statement performance to expectations we are able to gauge where stock prices might head based not on the underlying strength of income statements, but the strength of those income statement compared to expectations. After all, as we’ve seen over the course of the last 6 months it doesn’t take robust organic earnings growth to drive prices higher. It simply takes very depressed expectations and an improvement in the level of deterioration. Stocks move based on reality compared to expectations – not just reality.
As we predicted in mid-October with the S&P at 1,100, the expectation ratio was likely to peak as analyst’s expectations couldn’t possibly be much farther from the earnings reality. We said analysts upgrades and price target increases would likely keep a floor under the market and like clockwork we’ve seen dozens of upgrades every day as analysts play catch-up and boost their earnings estimates. This is reflected in the declining expectation ratio which is now forecasting more strong earnings, but at a lesser rate compared to expectations. The latest reading of 1.31 shows that income statements remain robust compared to analyst expectations. This is likely to support the market heading into the next earnings season, but gains are likely to become more and more difficult. I very much agree with Teun Draaisma at Morgan Stanley who believes the earnings picture will get substantially more challenging in 2010 and likely lead to sub-par equity growth. For now, however, short positions remain risky propositions in our opinion. In fact, I would look to implement tactical long positions in the beginning of January as earnings begin to roll out in the latter half of January. Investors are certain to bid up prices into and during the upcoming earnings season, which, based on my early analysis, will likely be very similar to the previous 3.
S&P continues to soar, nice prediction.
you call 1100 to 1111 soaring?
Looks like a spam comment. I have not been right about the market recently. I just haven’t been wrong either….
I acknowledge that the bearish technical scenario that seemed to be developing a few days ago has been denied…A denied bearish set up is bullish.
substracting profits between the two hereunder profiles may help to see what is wrong!
Corporate profits after tax
http://research.stlouisfed.org/fred2/series/CP
Non financial corporate business profits after tax
http://research.stlouisfed.org/fred2/series/NFCPATAX
Universal pattern
Isn’t the ER partially just a call on the USD?
How so?
If the SP500 earnings is 40% foreign, then the expectation should be biased by the USD. Therefore, if the ER analysis expects the USD to decline, but analysts do not (in their EPS estimates), then the ER is a call on the USD. … Unless of course the ER analysis and analysts projections are identical? Maybe I’m thinking about it too hard. Cheers.
There is certainly a dollar component to the ER, but the dollar does not tend to sway total earnings by large margins (a few percentage points in any given quarter). For now, the ER is telling me that analysts are still playing catch-up and we see that every single Monday when dozens of upgrades are initiated.
TPC,
A nice read from The Big Picture (and the bubble riders sang, it’s different this time)(until it isn’t):
http://www.ritholtz.com/blog/2009/12/jim-welsh-the-real-elephant-in-the-room/
Stock aren’t moving higher because expectations are depressed, they’re moving higher because of the same rampant speculation that propped up the market 2003-2007. There was no fundamental support for a bull market in 2003 (the 2003 “bull” started from a long-term P/E over 30), and there’s no fundamental support now. Stocks are going up because more knuckleheads want to buy than sell. Volume is very light for a “bull” market (more like B.S. market). Wake up.
this is nothing short of beautiful and perfect. for idiots dont know how to use the wonderful prediction please buzz off.
The analysts and portfolio managers, having either received their bonuses or been laid off (in some cases both), are loafing around in the sunshine somewhere. There is no interest in the market, so no volume. The indices will go sideways until volume increases.
The pols are so dumb they think they can score brownie points giving the money the banks no longer need to the jobless by hook or by crook (who it belongs to in the first place). Wrong again, whatever they decide to do will just erode their credibility even further.
You are correct that interest in the market won’t return until the ratings catch up with recovering earnings reports.