As Profits Soar, Will Stocks?


Some recent market comments were picked up by the WSJ this morning: “As Profits Soar, Will Stocks?” discusses why corporate earnings — expected to widely surprise to the upside (if you expect it, is it really a surprise?) — will not likely result in outsize market moves. We mentioned this previously in “The Sweet Spot?

Here’s what a small world Wall Street is: I’m having lunch this week with Joe Kalinowski, a friend at Puglisi & Co. In the same article, he had the money quote:

But the reaction among investors could be more akin to a polite round of applause. “What we expect is a continuation of what we’ve seen for the last year — huge upward surprises [in earnings], companies crushing their consensus numbers and upward revisions in terms of forecasts,” says Joe Kalinowski, chief investment strategist at Puglisi & Co., a New York brokerage house specializing in earnings-based analysis. “The twist is that stock-price reactions are more and more muted with each successive quarter. The numbers have caught up to the market, so I expect a strong reporting season, but not a huge rally in the market.”

My comments are similarly circumspect, and I am certain to get the Bear label thrown at me:

“Regardless of how good the numbers may be this quarter, the market already has likely seen its best gains, at least based on earnings improvements,” says Barry Ritholtz, chief market strategist at Maxim Group in New York. “Expectations are very high, and key metrics — things like valuation and interest rates — are all likely to go in the wrong direction.”

To clarify, this doesn’t mean I expect the market to go down after this consolidation is over. Rather, it suggests that the low hanging fruit have been picked. I expect the market will grind higher, not run away like it did in 2003.

Earnings versus Market Performance
click for larger chart
Source: WSJ

Another nice chart from a major publication! Glad to see those graphics departments are humming along . . .

As Profits Soar, Will Stocks?
Though Earnings Are Up Again, Investors May Not Be Impressed, Figuring They Have Hit a Peak
Erin Schulte
Wall Street Journal, March 22, 2004,,SB107970812615160308,00.html

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