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Will Wall Street Sell the Earnings News?

Investors will be watching some of the big early reports for an idea of where we're heading

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The S&P 500 has been enjoying a monumental bullish run during the past month that many market analysts were convinced could never happen. With every higher high, the “perma-bears” have become more bearish, and they’ve been adding members to their ranks. After all, the market can’t possibly go any higher — can it?

Will Wall Street Sell the Earnings News?
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We’re going to find out the answer to that question as earnings season gets underway in earnest this week.

You’ve all heard the adage “Buy the rumor and sell the news.” Well, the S&P 500 is in a precarious situation because it appears that everyone on Wall Street, except the perma-bears, has been buying the rumor that earnings season is going to be great and that things could get even better if tax-reform passes.

With so much “rumor-buying,” the S&P 500 has risen more than 130 points since its recent low in mid-August, generating a lot of profits that are just sitting there waiting to be taken off the table if the earnings season surprises aren’t bullish enough and traders decide to “sell the news” (see Fig. 1).

Fig. 1 — S&P 500 Pre-Earnings Season Consolidation

So what type of year-over-year growth are traders looking for this earnings season?

According to FactSet, analysts estimate the S&P 500 will see 2.9% year-over-year growth for the third quarter (see Fig. 2).

Fig. 2 — S&P 500 Estimated Earnings Growth (source FactSet)

A 2.9% growth rate would be lower than the year-over-year growth rate we saw in the second quarter, and it would definitely be lower than the growth rate we saw in the first quarter, but the earnings growth we saw during those quarters was largely driven by rebounding energy prices, which seem to be moderating.

If corporate America can beat expectations and show a growth rate closer to 4.5% to 5% — similar to the fourth quarter of 2016 (see Fig. 2) — it may just be enough to keep the bullish party going for a few more quarters.

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Article printed from InvestorPlace Media,

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