Stocks Tend to Recover Before Their Earnings Do

We talk a lot about bear markets sowing pessimism—and that pessimism building the next bull market’s wall of worry. Inevitably it risks becoming cliché. But then a concrete example comes along. Like this one: Last summer, when stocks first reached bear market territory, pundits everywhere said analysts needed to slash earnings expectations before stocks could bottom and a recovery could begin. Only that would show they had brought expectations back in line with reality, purging their supposedly irrational optimism. Well, they have done that. Expectations for Q4 S&P 500 earnings have plunged from 4.8% y/y growth in late September to a -4.9% decline now, as earnings season dawns.^[i] That is one of the biggest swings on record. Yet now people say even this is too optimistic, and analysts must pencil in more red ink to ensure troubles are fully baked in. This, folks, is the “pessimism of disbelief” that underpins new bull markets. Read Full Article »