This commentary originally appeared on Real Money Pro on Oct. 4 at 8:49 a.m. EDT.Under the weight of anxiety in Europe and in China, the market has caved over the last two days, and that drop is continuing this morning in the futures market as the European bourses continue their implosion. As well, there is little doubt that fund redemptions and the impact of high-frequency, price-momentum strategies when combined with the newest form of financial weapons of mass destruction (i.e., leveraged ETFs) are exacerbating the sharp downturn in the world's stock markets. This market pressure is occurring despite the appearance of more favorable than consensus current hard domestic economic data. As an example, last week's leading economic indicators and yesterday's national ISM were better than expected. September automobile industry data (SAAR) came in at 13 million units compared to 12.1 million units in August. Importantly, according to Citigroup's analysts, the month of September started strong, paused mid-month and ended with improvement. The average age of the auto on the road now exceeds 11 years, so there is a lot of latent demand. Unlike the residential real estate industry, which is burdened by an extraordinarily high unsold shadow inventory of homes, the automobile industry is growing, and its future prospects (despite the current market negativity) are healthy and are not challenged by supply. Ford ( F) and General Motors ( GM) are among my largest equity holdings; they both are picking up market share and their incentives seem tame. The better automobile numbers and other consumer data are consistent with about 2% growth in real consumer spending in third quarter 2011, an acceleration from the second-quarter trend. Overall, real GDP in third quarter 2011 should double second-quarter 2011 growth and be in the range of +2.0% to +2.5%. So, the coincident and hard domestic economic data is not indicating anything close to a recession. By contrast, Europe is a mess, and Goldman Sachs ( GS) took down its GDP forecasts for the eurozone last night. So, where do we now stand? The U.S. stock market, on a P/E multiple basis, appears to be discounting 2011 S&P 500 earnings of about $78 a share, which I believe will turn out too low. (The current rate of earnings is annualizing at $100 a share in third quarter 2011). But, given risk premiums (earnings yield less corporate bond yields), the market is discounting 2012 S&P profits of slightly under $60 a share, which, to me, seems ridiculous.
Though the last two recessions saw sharp profits downturns, the average recessionary earnings drop is only about 16%. Today, corporations are well positioned from a balance sheet (liquidity and inventory-wise) perspective vs. those previous periods. As described in yesterday's column, "10 Questions for the Bulls," my base economic case is that we muddle through with real GDP growth of about 2% over the next four quarters. Melding my four economic scenarios (ranging from a better economic recovery to a deep recession) together produces a price target on the S&P 500 of around 1205, or around 10% higher than the current level. Doug Kass writes daily for Real Money Pro , a premium service from TheStreet. For a free trial to Real Money Pro and exclusive access to Mr. Kass's daily trades and market commentary, please click here.