September 26, 2019
The drama machine on Capitol Hill and in the media continues to suck people in, and cloud their judgement on the economy and markets.
Remember, earlier this month, we looked at this chart from Pew Research that explains this bifurcated view on what we hear from the media and some of Wall Street, relative to what is happening in markets and the economy.
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The bottom line: Democrats are largely expecting a recession. Republicans are expecting a boom.
In addition to good economic fundamentals and ultra-low rates (which is designed to incentivize risk taking), this political sentiment division is adding more fuel for stocks. It's the proverbial wall of worry that tends to be constructive for bull markets. Why does it work? Because it breeds positive surprises. Meanwhile, we have just two days remaining in the third quarter. And we will soon have some earnings to evaluate. Remember, never underestimate the appetite for Wall Street and corporate America to dial down expectations when given the opportunity. They dialed down earnings estimates for Q4. We got positive surprises. Same for Q1. Same for Q2.
With that, as we head into Q3, as you might expect, estimates have been lowered – again. As ended the second quarter, Wall Street was looking for a slight decline in year-over-year earnings for Q3 — a 0.3% decline. That number has since been ratcheted down, looking for earnings contraction of -3.8%. That sets the table for positive surprises.
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