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Friday morning I had an extended conversation with Sheraz Mian, our Director of Research. He is one of the few people on this planet who specializes in the area of corporate earnings.
His assessment of earnings season so far this quarter is neutral over all. But if you strip out the strong earnings in financial stocks, then earnings growth is actually negative... and thus this earnings season is actually quite poor.
The above event also means that current estimates for most other firms are too robust for the back half of 2013 and into 2014. This will lead to more negative estimate revisions versus positive going forward.
Reity, you guys believe in the power of earnings estimate revisions. Isn't this an ominous sign?
In the short run it is no different than what has been happening since the beginning of 2012. Estimates keep getting trimmed, but since stocks were so much more attractive than bonds or cash, then they rose in value. And there likely is more room to the upside with that equation as people lose money in their bond holdings.
However, in the long run when stocks become fully valued and estimates are coming down, then stocks will stagnate or retreat. We are not there yet, but a realistic concern for the future if stocks keep racing higher without a stronger earnings backdrop.
Stay bullish for now. And we will keep you posted as to when it is time to start getting more defensive.
• Ahead of the Market (daily commentary from Sheraz Mian getting you ready for each new trading day).
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