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Earnings Reporting Season

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DOW + 80 = 18,226
SPX + 7 = 2137
NAS + 31 = 4988
10 Y + .07 = 1.43%
OIL – .65 = 44.76
GOLD – 10.80 = 1355.60

The S&P 500 Index traded at a new intra-day high this morning, topping 2143, and closing at a record high 2137, taking out the old high of 2130 from May of last year.

And just because we hit a new high, doesn’t mean we’ve reached the top.Typically, a breakout results in a bullish rally. The market has broken its multiyear record 17 times, and each of those instances has been followed by prolonged growth. After these 17 multiyear highs, the average return for the S&P 500 has been 8.5% over the next six months and a whopping 15.5% over the next year. Not a guarantee, just an indication of past performance. If you are a bit cautious, wait for confirmation, such as a weekly close above the old high.

So it may come as a surprise that the S&P 500 is also poised to match its longest earnings recession since 1936. At 25 times reported profit, the S&P 500 is trading at a higher multiple than it has for 90 percent of the time in the past eight decades. Earnings have been declining for four consecutive quarters, and if the second quarter numbers do not improve we will have a fifth consecutive quarter of declining earnings. Earnings are not expected to improve; they will probably be down about 5.6% from a year earlier, according to FactSet. And yet, a majority of stocks will probably report better than expected earnings. The average “beat rate” – the percent of the time a company beats the consensus earnings estimate – is 61% for the broad market.

Wall Street analysts lower the bar for earnings and then cheer when a company steps or stumbles over the bar. The “typical” quarter sees companies in aggregate report better-than-expected numbers, with the average margin of upside running around four percentage points. If the pattern persists, companies have an outside shot of ending about even with the 2015 period. The current forecasts for the third quarter are for a slight dip of less than 1 percent in profits, followed by a more notable bounce-back in the fourth quarter.

As far as deciphering the actual earnings reports, well I’ve been reading and analyzing reports for a couple of decades and it just keeps getting tougher and tougher to make sense of the numbers. An analysis of results from 500 major companies by The Associated Press, based on data provided by S&P Capital IQ, a research firm, found that the gap between the “adjusted” profits that analysts cite and bottom-line earnings figures that companies are legally obliged to report, or net income, has widened dramatically over the past five years. At one of every five companies, these “adjusted” profits were higher than net income by 50 percent or more. Many more companies are in that category now than there were five years ago. And some companies that seem profitable on an adjusted basis are actually losing money.

Lynn Turner, chief accountant at the Securities and Exchange Commission, said companies are still touting “made-up, phony numbers”...


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