The proprietary expectation ratio continues to show signs of improvement. The indicator is the ratio of analyst expectations vs. actual corporate earnings. The important difference between this indicator and a typical earnings chart is that it includes the psychological side, i.e., the market’s expectations. Earnings are only a good indicator in terms of what the market expects. For instance, AAPL can report 30% year over year growth, but the numbers are only as good in terms of the markets expectations. If expectations are for 35% growth then the quarter is a disappointment.
The indicator continues to improve as more and more companies report during the quarter. I see this as a highly positive development. The indicator was early to turn negative in 2007 and will likely be early to turn in 2009.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.