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Portfolio > Economy & Markets

Negative Earnings Expectations Could Prompt Market Rally: Searching for Alpha for April 2016

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Earnings season is coming in a few weeks, and analysts are bracing for a third consecutive quarter-over-prior-year profit decline. According to Thomson Reuters, S&P 500 earnings are expected to fall 6.9% from the same quarter last year (or 1.8% excluding the energy sector). 

While this might explain the high level of short interest – Fundstrat Global Advisors says it’s still above levels hit in March 2009 – all those shorts could be fuel for the next market rally if earnings beat consensus estimates.

There are several reasons to be encouraged. Since January’s earnings revisions, the dollar has fallen and crude oil has risen. The credit market has enjoyed a significant bounce as well. Investor sentiment has also improved, and there’s evidence of retail interest in the market.

Valuations could pose a problem for bulls. At 16.4, the forward 12-month P/E is higher than its ten-year average, according to FactSet. But the Fed’s seeming inability to raise rates while the rest of the world clamors for easing should help support a higher ratio

The virtual wholesale agreement among analysts that the sky is falling may mean that expectations are overly negative. If that’s the case, we could see a continuation of the rally that began last month.

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