In yesterday’s column, I debunked the myth that the stock market is long overdue for a pullback.
You might not believe it, but it’s true!
That being said, I’m afraid many of you walked away thinking that it’s simply a matter of (more) time passing by before a pullback or correction materializes.
That’s not the case, though.
You see, the mere passage of time doesn’t usher in pullbacks. It takes something specific to trigger them.
Or, as Deutsche Bank’s David Bianco says, dips might be inevitable, but “they don’t happen in absence of bad news or emerging risk.”
And right now, there are no emerging risks on the horizon. Don’t just take my word for it, though.
“We’ve got low inflation, improving domestic and global trends, [an] accommodative Fed, and it all adds up to a package that is a constructive backdrop for equities,” says Jim Russell, Senior Equity Strategist at U.S. Bank Wealth Management.
Indeed. That only leaves really bad news as a possible catalyst for a pullback or correction. So what type of bad news could ultimately trip up the stock market?
The opposite of what’s propelling it higher, of course!
Don’t Forget the Golden Rule
Forget a 5% pullback or a 10% correction. Some pundits and investors believe we’re in store for a massive 25% meltdown.
Fear mongers! Or maybe they’re just afraid of violating Warren Buffett’s golden rule of investing to “never lose money.”
Whatever their motivation, it doesn’t matter. The reality is, it’s going to take a sudden drop in corporate profits to collapse the stock market.
After all, stock prices ultimately follow earnings. I know I’ve told you that countless times already. But I’m afraid many of you still don’t believe it.
Maybe you just need to hear it said differently? If so, consider Larry Kudlow’s phrasing: “Profits are the mother’s milk of stocks.”
Too National Geographic for you? Ok. On second thought, maybe you just need additional proof.
Well, here it is, courtesy of Dr. Mark Perry at American Enterprise Institute (AEI).
As Perry explains, a one-to-one relationship exists between stock prices and after-tax corporate profits. For every increase of $1 billion in profits, the S&P 500 rises about 1 point. That is, with two notable exceptions: the dot-com bubble and the Great Recession.
As you can see, stock prices got too far ahead of corporate earnings during those periods. Sure enough, the market restored the relationship between corporate profits and stock prices by collapsing.
Or, put simply, stock prices ultimately followed earnings.
Here’s why all this matters…
According to Perry, “In the current bull market rally… corporate profits are consistent with stock market levels.” So the one-to-one relationship is in full effect. And that means there’s nothing abnormal about the current bull market. Corporate profits are driving stock prices.
By extension, as long as corporate profits keep increasing, stock prices should, too. And that’s exactly what analysts expect to happen…
After rising for more than three years, the consensus estimate calls for profits for S&P 500 companies to keep climbing to hit a record of $109.30 this year.
Bottom line: Absent a sudden drop in corporate profits – or the Fed unexpectedly pulling the plug on its quantitative easing initiatives – a pullback or correction is not going to magically materialize.
Stay tuned for tomorrow, though. I’ll share three key metrics to help you detect any deterioration in earnings – well ahead of the average investor.
Ahead of the tape,
Louis Basenese
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About Wall Street Daily
In a World of Liars, the Truth Starts Here…
The harsh reality is that you’re being lied to every day – over and over again.
Wall Street is lying to you. The talking heads on television are lying to you. Your banker is lying to you. Your local Congressman is lying to you. Even your own broker is lying to you (mostly because he’s being lied to).
Consider: Behavioral science tells us that bankers and politicians are lying to us 93% of the time. And that Wall Street is 13 times more likely to tell a lie than the truth.
They win and we lose because our brains have been conditioned to cooperate in their con game.
But I believe you deserve the truth.
And to see that you get it, I’ve assembled a team of unbiased, seasoned investment professionals who pick apart the market’s biggest headlines on a daily basis.
Our mission?
To challenge Wall Street’s most widely accepted wisdom. And uncover the real intentions behind the greatest moneymaking machine of all time.
Along the way, we’ll also expose the profit trends others simply don’t have the experience to detect (or the courage to broadcast).
Bottom line, the most informed investor always wins. And getting you clued in is our top priority.
That’s why I’m personally challenging you to read our daily content for the next 30 days and see for yourself. If we’re doing our job effectively, you should notice it on your brokerage statement.
So don’t delay. To start getting a healthy dose of genuine, no-nonsense, 100% unbiased investment research and market commentary – i.e. THE TRUTH – justsign up below.
Ahead of the tape,
Louis Basenese
Chief Investment Strategist
