Investor Expectations vs. Economic Data: How They Sway the Stock Market
- We’re in an earnings recession, but one chart tells Chad Shoop not to worry about the market.
- This chart tracks the “expectations vs. reality” battle in the stock market — and it’s looking nothing like it did in 2008.
- Chad shares a sure way to take advantage of this battle, no matter what.
Right now, earnings aren’t doing so hot.
Since the beginning of the year, corporations have reported negative earnings growth.
It’s happened each and every quarter of 2019, making this the third quarter in a row. And Wall Street is wondering what this means.
After all, it’s only happened twice since the Great Recession of 2008.
So it sounds like a dire time for the market. That’s why stocks have been flat over the past year — corporate earnings are just not growing.
But, as I have written before, this is actually good news.
I know that sounds crazy, but an earnings recession without an economic recession is a positive sign for the market.
After all, the market is all about expectations versus reality. Poor earnings mean poor expectations. But as the economy keeps rumbling away and earnings beat expectations (even if those earnings are negative) … well, that’s how bull markets continue.
And let me tell you now: There’s no sign of an economic recession at the moment. This gives us the all-clear to stay bullish.
Today, I have one chart that proves it. It tracks expectations versus the actual results of corporation reports.
If the actual results are better than expectations, it means corporations are outperforming.
That’s great news for investors like us. Especially when we have a way to take advantage of it … as I will show you at the end of this article.
This Chart Predicts a Positive Outlook for the Bull Market
Before talking about what is happening right now, it’s important to understand why it’s happening.
Watch my video below to learn more about corporate earnings and investors’ expectations, and how they influence the stock market.
In a nutshell, when the actual results are worse than investors’ expectations, then it’s time to run for cover because they can drag the stock market way down.
But we haven’t seen negative earnings growth come in worse than investors’ expectations since the Great Recession.
And it’s not happening today.
This bar chart says it all:
As you can see, the dark blue bars are actual results. The gray shaded bars represent investors’ expectations.
Right now, expectations are for a negative 3.8% decline in earnings.
That doesn’t sound great. But as long as corporations can beat that in the third quarter, you have nothing to worry about.
The Difference: 2008 vs. Now
When companies reported earnings in 2008, they were well below what investors were expecting.
Back then, it was a sign that things were getting worse in the real world.
But the market didn’t bottom until the end of the first quarter of 2009, which is when actual earnings and expectations were in line with each other.
It’s important for you to know that earnings data are confirmed on a delayed basis.
Right now, for example, we have an estimate for the third quarter, which ended on September 30.
We won’t have a clear idea of how good or bad actual earnings are until mid-November.
I’ll let you know what happens. But for now, just know that earnings expectations are a useful tool. They confirm or reject the stock market’s current moves.
However, if you trade on earnings like I do, you don’t even have to worry about it.
Trade Earnings With Less Risk
Most investors get excited and try to bet on which direction a stock will go before the company announces earnings.
I wait until after the earnings announcement.
Then I use proven trends the stock is set to benefit from: either a continued rally or a drop lower.
By placing my trades after earnings, I already know how the actual earnings did compared to expectations.
This allows me to avoid the risk that comes with predicting earnings and create more consistent returns.
We are getting into the heart of earnings season in the coming weeks. If you want to jump on these opportunities, click here to learn more.
In the meantime, keep an eye on the “expectations versus reality” battle. Right now, all signs are predicting the bull market will continue higher.
It will pay to stay bullish.
Chad Shoop, CMT
Editor, Quick Hit Profits – better options trading strategies
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