There are at least two weird things going on in the financial markets right now. We’ve already mentioned multiple times that stocks have been rallying, while Treasury yields have held steady near historic lows (although yields seem to be rising a bit today).
The other strange relationship is that stocks are rising as Q4 earnings announcements diappoint and forward earnings estimates are revised down. Granted, only 7% of the S&P 500 have announced their Q4 financial results during this earnings season. However, 110 companies have preannounced their results, and the trend has not been good.
Barclays’ Barry Knapp thinks all of this is a recipe for some volatility in the stock markets. From his latest U.S. Equity Strategy Instant Insights note:
Equities currently look fairly priced relative to our earnings forecast for 2012. However, having rallied from below 1200 over the past six weeks, even as earnings estimates fell, we do not expect a favourable reaction to either the reality of slowing growth or the inability to beat expectations significantly. In addition, two earnings-related indicators – the ratio of negative-to-positive preannouncements and our earnings surprise index for the 7% of S&P 500 companies that have reported – point to a poor-to-middling earnings season.
Below is a historic look at the two indicators he mentions. Not pretty.
Photo: Barclays Capital