Still Bullish After All of These Years…
Bill Gunderson | May 10, 2016

This has been called one of the most hated bull markets of all time.

I suppose that if you have been sitting on the sidelines for the last seven years you would indeed hate this bull.

Even worse yet, if you have been a skeptical bear for the last seven years, you would be downright grouchy today.

Put the name of your favorite perma-bear here…

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The skeptics have had all kinds of reasons to sit this one out.

They have said that this has been a Fed induced bull market. They are right, but does your 401-K really care?

They have said that corporations have been creating earnings out of thin air, by buying back their own shares and cutting expenses in the face of flat sales.

Right again! These are just a few of the ways that companies have to keep earnings growth going during a slow-growth economy.

For the last seven years, I have heard pundits telling me to avoid the market and buy gold instead.

Wrong! I watched gold go from $1,800 per ounce down to $1,000 per ounce. That was not very good advice.

Gold has been finally reversing course lately, however. As the Fed remains dovish and the dollar contuse to shrink, I am once again fairly bullish on gold. But I have avoided it for the last several years.

While gold was going down, down, down, the stock market was going up, up, up.

The bears have been wrong since March of 2009. That is over seven years of egg on one’s face. That’s one big omelette!

In late March of 2009, I wrote in my newsletter “that a new bull market has been born.” I have been cautious many times over the last seven-plus years, but I have never retracted my bull call.

I am not a perma-bull however, I am a market timer. But, it is impossible to time the market, you say. It is best to just stay full invested right on through that next recession and ensuing bear market. Be my guest, I am going to continue to watch the Fed, the economy, and earnings for clues that the next bear is coming out of hibernation.

Speaking of earnings, they are the fuel that drives markets higher. Just like a fire, when the fuel runs out, the fire goes out. When earnings run out the market starts to recede. What does our fuel gage look like right now?

During the prior bull cycle, S&P 500 earnings peaked at $83.20 per share in 2006. Earnings had been growing for several years prior to that and the market was following those earnings higher.

Then earnings began to recede in 2007, when S&P 500 earnings came in at $81.80 per share. Looking back, that was the warning shot fired across the bow of that bull market. While earnings were peaking in 2006, the S&P 500 was also topping out. It eventually hit its peak of 1,576 in October of that year as earnings expectations began to go lower.


Stocks and markets follow earnings. As earnings grow, stocks go higher. When earning begin to level off and recede, stocks do the same. You can see from the chart above how the stock market peaked at about the same time earnings peaked. As earnings expectations began to recede, so did the market.

Earnings for the S&P 500 finally bottomed out at $59.34 per share in 2009 and from there began to grow again. The market followed, by moving higher along with those earnings.

That same dynamic works for individual stocks. Apple is a good example of how this relationship between earnings and stock price appreciation works.

Apple’s earnings have been growing for the last decade. The stock has followed right along with the growth in those earnings. Earnings for Apple peaked in 2015, however at $9.22 per share. The stock also peaked at about the same time.

Apples earnings and future expectations are now receding and so is the stock. After peaking at $9.22 per share in 2015, expectations for Apple’s earnings in 2016 are currently at $8.27 per share.

No wonder the stock is dropping. No wonder I do not currently own Apple or have any interest in it. Apple has been good to me in the past. It more than doubled after I featured it in my book back in 2011. But when earnings peak and then begin to shrink, I am gone.

Watching the trajectory of earnings and earnings expectations on stocks and indexes is obviously a very, very important endeavor.

As a market timer, it’s one of the most important factors for me to stay on top of. Everything else like the economy, interest rates, the Fed, etc. all funnel into these earnings expectations.

What does the earnings trajectory for the market currently look like? S&P 500 earnings have been growing ever since they bottomed back in 2009. No wonder the market has been going up since then.

All the perma-bears had to do was to follow along with earnings. Instead, to their detriment they stood on the sidelines and threw darts at those earnings.

Take note from the chart of earnings below that earnings for the S&P 500 have leveled off over the last two years. This has been brought about by the big drop in oil prices. As of now we are expecting very slight earnings growth here in 2016. Again, this flattening out in earnings has mostly come from the energy sector.

Earnings are expected to begin growing once again by the second half of this year. That is just around the corner. Earnings estimates for this year currently stand at about $119 per share for the S&P 500. This compares to about $118 per share last year. This is the major reason why the market is now basically flat on the year. It is because earnings remain flat.

We are now looking ahead to next year, however. Right now, the consensus estimate for next year is about $135 per share. Some analysts are higher and some are lower, but this is the current consensus.

This estimate is obviously subject to change week by week. About this same time last year, earnings expectations for this year were around $135 per share. Now they are clear down to $119 per share. Expectations continued to slide right along with oil prices. But it appears that expectations have finally solidified for now.

I am encouraged by the recent action in oil. It appears that oil finally bottomed out early this year at about $26 per barrel. It has been rebounding ever since.

I have also been encouraged by the actual earnings reports coming from the individual oil companies over the last several weeks. On my daily national radio show I have been calling it “oil stocks gone wild.”

For the most part companies like LPI, RIG, XEC, BTE, CLR, SDRL, CHK, CLMT, APA, FANG, DVN, RSPP, APC, DO, and HP have exceeded their expectations and the stocks have responded favorably.

This give me a lot more confidence in a resumption of market earnings growth and next year’s S&P 500 earnings estimates of $135 per share. If right, this could take the S&P 500 to 2,300 and possibly beyond.

As always however, we take one day, one week, one stock, and one sector at a time. I update my earnings estimates for the market every week in my newsletter. Stay tuned because a lot can happen between then and now.

I continue to remain bullish after all of these years, but as always I continue to look for signs of the next recession and bear market.

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