As the Northern Hemisphere braces for one the most hostilely cold winters on record, the financial world is stripping down to its skivvies in celebration of an alleged "sizzling" SEASON of fourth-quarter earnings.
Here's the gist: On Monday, January 11, the much-anticipated report card for publicly traded companies was released. And, thanks to a string of robust 4Q numbers -- i.e. a 213% gain in S&P 500 earnings -- the last few bears of Wall Street packed up their dens and went into hibernation.
On this, the following news items from the day take it from here:
- "Stocks Rally Into Earnings Season" (CNN Money)
- "US Stocks Open Higher: Earnings Seasons Expectations Lifted" (Wall Street Journal)
- "Stocks Rise On Eve Of Earnings Season... The underlying thesis behind the continued rally in stocks seems apparent and that is the belief that the global economy in 2010 will continue to improve, thus corporate earnings will continue to grow and therefore buy stocks." (MarketWatch)
There are just two itty bitty problems with this scenario: First, earnings are not an accurate reflection of a company's future growth; but rather, a summary of past performance.
Here, the December 2009 Elliott Wave Financial Forecast draws the following conclusion in the section "Stock Market Myths":
"Quarterly earnings reports announce a company's achievements from the previous quarter. Trying to predict futures prices movements based on what happened three months ago is akin to driving down the highway looking only in the rearview mirror. It leaves investors eating the markets dust when the trend changes."
Second problem: There is no consistent correlation between upbeat earnings and an uptrend in stock prices; or vice a versa, downbeat earnings and a decline in stocks. Here again, the December 2009 Elliott Wave Financial Forecast presents a groundbreaking chart of the S&P 500 versus S&P 500 Quarterly Earnings since 1998.
As you can see, the market enjoyed record quarterly earnings right alongside the historic, bear market turn in stocks in 2000. Then again, the first negative quarter ever in 2009 preceded the powerful, nine-month rally we see today.
In the end, earnings data is either a reflection of activity in the past OR of fear/hope-based expectations of the future. Neither one is here. Neither one is now. Neither one tells you where stocks go from this point on.