We can say this about
strategists: They are usually wrong before they are right.
Back in February,
that many of the top
forecasters were calling for a challenging market.
Many of them thought the S&P 500 would finish the year at
around 1,350 or lower, but that happened to correspond with where
the market was trading at the time. It turned out they were out of
touch, as the market rallied nicely.
These days, that dim view for the broader market is looking a
lot more perceptive.
At this point, there are enough headwinds in place to make you
wonder whether we've seen the highs for the year. Of course, the
market has been able to power past economic headwinds before (most
notably in the fall of 2010 and the fall of 2011) so it's too soon
to write the market off completely.
Of course, we'll get a fresh read on the market's direction as
companies weigh in with second-quarter results. As I've noted
before, results for the second quarter may be OK, but companies
might start talking about how current economic conditions are
making it a challenge to meet third-quarter forecasts. Analysts
have been steadily lowering their
assumptions for the third quarter, and we'll soon know if more cuts
in these forecasts are necessary.
Analysts at Merrill Lynch are now noting concerns that investors
should be fretting about the fourth quarter's profit levels. They
have a hard time squaring the fact that while consensus forecasts
for the S&P 500call for
per share to rise 14% in the fourth quarter from a year earlier,
they say the U.S.
will have grown just 1% by then.
Merrill's key takeaway:
"Although the bottom-up consensus forecasts have continued to
drift lower since last summer, they still appear too optimistic
in light of the ongoing European crisis, the looming fiscal cliff
and the slowdown in China. The recent weakness in earnings
revision and guidance trends may be a sign that consensus
expectations are in the early stages of being reset lower."
Merrill's strategists have an especially dim view for
fourth-quarter profits among technology, energy, financial and
industrial stocks, and expect consensus forecasts to come down in
these four groups. These analysts now expect aggregated profits for
the S&P to rise 4% in 2012 to about $102 and another 7% in 2013
This means the S&P 500 is valued at around 12.2 times that
2013 forecast, which may seem a bit rich in the context of anemic
The pivot point
Here's what we don't know: At which point will investors stop
feeling the heat of near-term profit pressures and start focusing
on how cheap stocks are in the context of the economy and corporate
profits in 2014 and 2015? History has shown that stocks begin to
rally once investors start to look past a trough.
You could make a reasonable case that the global economy will
constrain corporate profits for the next three to six quarters. But
when the housing market gets back on its feet, when the European
crisis has morphed into a series of permanent fixes, and when
emerging economies like Brazil and China are back on a robust plane
of growth, then U.S.
growth could move back toward 3-4% and S&P 500 profits
could hit $120-125 per share.
How likely is such a scenario to play out in 2014? Time will
tell, but it may be unwise for long-term investors to focus on a
sober near-term outlook for the U.S. economy when its considerable
strengths may finally take root by 2014.
Risks to Consider:
Merrill Lynch's dim near-term view is likely to be echoed by
other market watchers once second-quarter results have been
digested, so get ready for a tough trading month.
Action to Take -->
Once investors look past the present (and the mid-term), they are
likely to take note of a reasonably valued market in the context of
longer-term merits. This kind of long-term view is exactly why we
stress the importance of "forever stocks" in our
newsletter. Because while the near-term macro picture might not
look very promising, investors will likely do well as long as they
focus on buying
of solid, industry-dominating companies at reasonable
Indeed, we may see a redux of 2011, when stocks slumped badly
into August and then posted a solid rebound once the fourth quarter
kicked in. By then, "investors were looking ahead," and though the
2013 outlook will likely be challenging, expect to hear more
chatter about a 2014 renaissance.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.