Fisher Investments Editorial Staff
Forecasting, Investor Sentiment

A Strong Second Six

By, 09/30/2009

Story Highlights:

  • As we continue along the "V," sentiment and liquidity will drive equity prices more than fundamentals.
  • Though corporate earnings may continue weak on an absolute basis, they should still outstrip overly dour expectations.
  • Beginning in the fourth quarter, earnings will face an easy-to-beat prior year benchmark, boosting absolute growth rates and again outstripping expectations.



With a steep six-month stock recovery behind us (world stocks are up 66%* as of Tuesday), what can we expect for the next six? Turns out the ride doesn't have to end here—stocks can ride the "V" recovery's momentum for months to come. On average historically, the second six months of young bull markets have delivered consistently strong returns. And as stocks move along the V, sentiment and liquidity should continue to be major factors driving prices.


If sentiment and liquidity are as impactful (if not more so) than fundamentals in the period ahead, how do looming quarterly earnings reports fit in? Last quarter, only 31% of S&P 500 firms reported positive earnings growth. In better times, such poor relative performance would be fundamentally chilling. But during a V recovery, sentiment can matter more—76% of S&P 500 companies beat expectations in the second quarter. For battered investor psyches, the 76% surprise to the upside was a potent sentiment boost—far outweighing absolute earnings results.**


We expect more of the same this quarter. Earnings year-over-year still face a relatively high benchmark, set third quarter 2008—before the panic had fully translated economically. Through that lens, profits might again look less-than-stellar in absolute terms. But again, relative sentiment matters more, and though much improved, investor expectations continue to lag reality. Further, profits have steadily improved quarter to quarter. Firms equipped for worsening economic conditions are instead increasingly facing improving conditions. Absolute performance this quarter may be better than last.


Looking forward, super-lean firms will not only continue boosting bottom lines as the economy heats up, but healthier earnings will face an increasingly easy-to-beat year-over-year benchmark. This effect will begin in earnest next quarter, when this year's healthier earnings are compared to last year's nosediving profits. Fourth quarter year-over-year growth rates may likewise handily outstrip expectations. Combined with much-improved absolute growth rates, we expect ample sustenance for stocks' strong second six (and beyond).



*Source: Bloomberg

**Source: Bloomberg; as of 9/14/09

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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