Stocks Can Rally Even as Earnings Deteriorate, Leuthold Says
Stocks Can Rally Even as Earnings Deteriorate, Leuthold Says
(Bloomberg) -- Concerns about depressed corporate profits bringing down the stock market may be misplaced if history is a guide, according to The Leuthold Group.
There’s been only one major episode in data back to 1950 where earnings recovered before the stock market did, Leuthold’s James Paulsen wrote in a note Thursday, and that was the aftermath of the dot-com crash in 2002. In every other case, stocks started to rise before earnings, and in some instances even gained when the earnings were deteriorating at a rapid pace, he said.
“Simply because earnings are headed lower does not necessarily imply the stock market has to fall further,” Paulsen wrote. “The stock market has almost always led changes in earnings results, not the other way around.”
Corporate profits are falling dramatically and may remain depressed for months amid the fallout from Covid-19. Among strategists tracked by Bloomberg, S&P 500 EPS estimates for 2020 have gone from a median $174 in mid-December to $130 on Thursday. However, the S&P 500 is up 25% from its March 23 closing low as investors cheer the monetary and fiscal stimulus being injected into the financial system, and as some signs emerge of slowing coronavirus spread.
“Perhaps, as it has frequently done since World War II, the stock market is already looking beyond current or even intermediate profit results and is reflecting the character of company fundamentals farther into the future,” Paulsen wrote.
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