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Jonathan Yates
Is the Bull Market Based on Overly Optimistic Earnings Projections for the Future?

My father, who worked in the securities industry almost his whole life, used to say that eventually it all came down to earnings.  Of course, that was in the pre-quantitative easing era of the Federal Reserve, Bank of England, Bank of Japan, and others.  Now it appears to be based more on liquidity and depth of the market, rather than the fundamentals.

In the last earnings season, about two-thirds of companies on the Standard & Poor’s 500 Index beat estimates.  More than one-quarter failed to meet Wall Street expectations.  That is somewhat worse than the average.

But all three indexes were up today.

At present, the Standard & Poor’s 500 Index is trading at a trailing twelve month price-to-earnings ratio of 16.89.  As the table below shows, the analyst community is very bullish about the future of earnings.  Projected are double digit earnings increases for well into 2014.  Not surprisingly, that is well within the parameters of Quantitative Easing III as set forth by Federal Reserve Chairman Ben Bernanke.

In addition, earnings were up but revenues were down.  That means that companies were posting better results not from selling more, but from cutting costs more.  Eventually a company runs out of workers to lay off and magazine subscriptions to cancel.

Consumer confidence is strong again.  But that has not translated into high earnings for companies.  As a point of reference, consumer confidence is back to where it was before the onslaught of The Great Recession.

Bullish sentiment still outweighs a bearish outlook on Wall Street.  New highs topped new lows by a better than 5-to-1 margin.  There were 3945 stocks advancing today with only 2159 declining.

The chart below shows six straight quarters double digit earnings growth.  That is a very lofty target for publicly traded companies to reach.  It will be interesting to see if the bull market can sustain its charge if those future earnings fall short of the expectations of the analyst community.

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