Just as portfolio managers are buying shares because the stock market is going up, the fundamental argument behind higher equity prices is starting to erode.
As the totals are coming into focus for the Q4 earnings period, disappointment is becoming the order of the day. Of the 291 S&P 500 companies that have reported so far, 165 have beat estimates, 92 matched, and 34 disappointed. This 57% "beat" ratio is the most disappointing in three years. Financials were far and away the biggest winners in the "disappointment sweepstakes".
It suggests that 2012 earnings could decelerate to as low as a 1.5% growth rate in Q1, 2012. It also hints that full year 2012 earnings could plunge from the 15% in 2011 to as low as 5% this year, bang on the prediction I made in my 2012 Asset Class Review at the beginning of January. The really scary part about these numbers is that the first half is when we were supposed to see the strength in the economy this year. If this is what the strength looks like, I can't wait to see the weakness.
Warning: the stock market is not discounting these numbers. Instead, it is discounting a goldilocks scenario that assumes a European quantitative easing is going to deliver a blistering 4% growth rate for the US. There is also some mumbo jumbo in circulation about the presidential election cycle further boosting asset prices, which is utter garbage. The corporate earnings coming through are confirming that this dream scenario is an impossibility. The (SPX) is now up 25% in fourth months. When the stock market figures this, watch out below!