This Rally Gets No Respect

Third quarter earnings season is underway, and results are not pretty.  So far, two thirds of companies that reported beat their earnings estimates, but only one third beat revenue estimates.  Both figures are below averages of the previous several quarters.  In addition, for the first time since 2009, earnings actually declined (by about 3%) compared to the year ago.  Forward guidance has been disappointing as well.  The weakness was across the board, with many prominent companies such as Apple and Google feeling the pain.

Despite these news, the correction that the market experienced was fairly mild, with S&P 500 losing less than 5% from its highs.   The silver lining here is that earnings decline has been anticipated by analysts, and the growth is expected to resume next year.  So far, the market remains in the rally mode that started in 2009.

In words of late Rodney Dangerfield, that rally gets no respect.  In a Franklin Templeton poll, 1,000 investors were interviewed about stock market performance.  Shockingly, more than half of respondents believed that the market declined in each of the preceding 3 years!  As a result of this huge disconnect with reality, many investors have not been participating in the advance.  Indeed, the flight from stock-based funds into bond funds continues: over $200 billion was taken out equities and put into bonds over the last year.  This kind of caution bodes well for the market in the long term.

Short term performance, as always, is anyone’s guess.  However, the weak earnings season is winding down, and elections are approaching.  Once someone is elected, a big uncertainty will be removed, and could provide a relief for the market next month.