When the last company dispatches its numbers for the quarter just passed, S&P 500 earnings will have risen by 13.6%, or so predicts First Call/Thomson Financial, via RTTNews. That would mark the 17th straight quarter of double-digit gains. As fundamentally driven tailwinds go, it doesn’t get much better than this for the stock market. So why is the S&P 500 slumping these days?
The highs for the year were set back in early May, when the S&P 500 closed above 1320 for four straight days. As of Friday’s close, the index has fallen about 6%. Technically, the market doesn’t look inclined to turn around any time soon: each rally since May has brought a lower peak than before.
Whatever ails the stock market, no one can say that weak earnings are to blame. But as the bears are quick to point out, there is any number of other reasons to sell these days, ranging from geopolitical tension to fears that an economic slowdown is coming.
But the bulls shouldn’t despair, writes Milton Ezrati, senior economic and market strategist at Lord Abbett. If equities moved sideways for the rest of this decade, as some predict, that would make this decade’s stock market performance since the 1930s, he observes in a research note published Friday. “If the popular forecast is correct and the S&P 500 were to show no further gain thorough the end of the decade,” he asserts,
the market would have no better performance than the Great Depression—an unlikely event, to be sure, especially in light of today’s positive fundamentals. If the index, aside from dividends, falls short of a 14 percent annual rise during the next 3½ years, this first decade of the 21st century would fall well short of any 10-year stretch of the past 30-plus years. We believe the implication of these statistics clearly is that matters are very likely to improve going forward. History is indeed on the side of the bulls.
Perhaps, although history is a guide to the future, not a guarantee. That said, it seems likely that when the Fed is truly done with its current round of rate hikes, there will be a relief rally that lasts more than a day or two. No less was suggested last Wednesday, when stocks rose sharply after Fed Chairman Bernanke made what some thought were dovish comments about monetary policy in testimony to Congress.