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Stock Bulls Have Extra Reason to Bolster Their Earnings View

Earnings Optimism at Small Businesses Bodes Well for Stock Bulls

(Bloomberg) -- Angst over a profit recession has kept Wall Street on edge all year, but rising confidence among a cohort of business owners is giving stock bulls reason to relax.

The National Federation of Independent Business optimism index jumped to a four-month high in November -- thanks largely to improved corporate earnings trends, which posted the biggest increase in about two years. That portends well for U.S. stocks, with the trend historically coinciding or leading annual growth in S&P 500 trailing earnings per share, according to The Leuthold Group’s Jim Paulsen.

Stock Bulls Have Extra Reason to Bolster Their Earnings View

“If earnings were to turn up, we might actually get some optimism out of that rather than just calmer fear,” said the firm’s chief investment strategist by phone. “That’s the next big event.”

Amid a slower economic backdrop and the ongoing U.S.-China trade tiff, the outlook for earnings has steadily deteriorated all year. Analysts expect 2019 profit growth of 1.4%, down from a forecast of about 8% at the beginning of the year. But an improved outlook has many betting on a rebound in 2020, with earnings projected to expand 9.2%, data compiled by Bloomberg Intelligence show.

In November, sentiment among small U.S. businesses climbed by the most in more than a year, with owners saying profit trends are looking up. The composition of the NFIB report showed that earnings trends were the biggest driver of the index’s increase.

U.S. job gains also roared back in November, with payrolls jumping the most since January and beating all survey estimates. That’s another sign of improved business confidence, said Paulsen.

“I don’t think we need super strong earnings growth -- we just need to show that it’s accelerating again,” he said. “If that would happen, that would be pretty meaningful for the overall stock market. A lot of portfolios would decide that they’re too underweighted equities.”

The S&P 500 rose 0.1% to 3,135.29 at 11:10 a.m. in New York Wednesday.

--With assistance from Sarah Ponczek.

To contact the reporter on this story: Vildana Hajric in New York at vhajric1@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Rita Nazareth, Dave Liedtka

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