Here is a collective list (but likely not all encompassing) of reasons why stocks have moved higher:
- Earnings are good
- Economy is still growing
- Global monetary stimulus still in place (even with the Fed raising rates)
- Potential for fiscal stimulus
- Dollar weakening
- More speculation as valuations get higher
- Generally positive momentum of most global economies
All of these are likely contributions to some degree and either have an impact on the fundamental return (earnings growth) or the speculative return (valuation expansion). However, one thing that isn’t getting much dialogue is that downward earnings revisions are less bad than prior years:
Source: Daily Shot
As you can see from the above chart, earnings consistently get revised down. In fact, I don’t think we have had earnings revised up in a quarter up since 2011. That’s something to keep in mind when you hear that earnings are revised down, they almost always are and as such what likely matters more is the degree to which they are revised downward.
Thus, the market probably anticipates earnings being revised down and therefore when they are revised down less than the prior trends it’s likely bullish for stocks. Nick Raich over at the Earnings Scout does some really good work on this.
Going forward this is a good development for the stock market; however, lower revisions mean higher hurdlers. If those hurdles aren’t met, and with valuations high, the market may be more susceptible to a correction.
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