Earnings and the Four-Year Cycle

The price action in the S&P 500 continues to support our working assumption about the market's four-year cycle, which is to say that the new cycle began last July with the SPX near 1235, and we are now 202 trading days into the new cycle.

With the index up about 22% since the new cycle's launch, it is moving well within the "normal" envelope, less than one standard deviation below the median performance.

The fact that this cycle's performance is slightly below the median is easily attributed to the fact that the cycle low formed last July was particularly mild as cycle lows go; the dip was modest, so the reactive rally up out of that dip had a bit less pop than it would have had the dip been more aggressive.

As you can see, if the market continues to maintain its character relative to its median and average cyclical performance, then a target of +25% to +30% around the end of calendar year 2007 (378 trading days into the cycle) looks reasonable (near our 1550 to 1600 target zone).

If the SPX is able to play catch-up with its normal cyclical performance, then we could be looking at SPX 1650 by year-end.

Source: TheAgileTrader

The Earnings Outlook

Standard & Poor's has now published its initial calendar year 2008 consensus earnings estimate. And that has goosed our forward 52-week consensus figure (blue line below) to a new all-time high of $97.87.

Source: TheAgileTrader

With the trailing 52-week EPS (yellow line above) at $89.99 (down 2 cents last week), the consensus for earnings growth during the coming year now stands at 8.75%.

Quality of earnings remains solid with trailing-reported earnings (pink line above) just 4.5% below trailing-operating earnings (yellow); the gap between operating and reported earnings is relatively small, representing a modest amount of write-offs and writedowns (financial engineering).

Sector-by-Sector Outlook

On a sector-by-sector basis, the most notable change last week was a rebound in the consensus for earnings in the energy sector.

Source: TheAgileTrader

Looking at anticipated growth in earnings for the coming year, telecom services, information technology and health care remain the standouts, all with expected earnings growth of greater than 15%.

Source: TheAgileTrader

The laggards are currently energy and materials, each with expected negative earnings growth. But these negative expectations may be more a function of skepticism following strong growth in trailing earnings than of bona fide negative expectations.

Earnings growth is expected to be about average (in line with the SPX) for utilities, consumer staples, industrials, financials and consumer discretionary stocks.

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Adam Oliensis is president of Dog Dreams Unlimited, a guaranteed introducing futures brokerage, and editor of the trading service The Agile Trader. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Oliensis appreciates your feedback; click here to send him an email.