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Will Earnings Disappointment Prompt Market Correction?

Thursday, 29 Mar 2012 | 2:20 AM ET

Wall Street firms have been touting the attractiveness of U.S. stocks, but one strategist says the three-year rally in U.S. equities is getting “long in the tooth” and investors will be disappointed by the earnings season, prompting a correction.

NYSE traders
Bloomberg | Getty Images
NYSE traders

"This is the first quarter in years that I think is going to show almost no growth, if at all, in corporate profits," Peter Boockvar, Portfolio Manager and Equity Strategist at Miller Tabak told CNBC. "S&P 500 as an index, I think that's topped out for now. I think we are going to roll over."

U.S. stocks are currently on track for the best first quarter since 2009 and the S&P 500 is up 11.8 percent since the start of the year.

Boockvar points out that profit margins for U.S. companies are receding from record highs and the global economy is slowing. “While the U.S. economy is improving, I don't think it's as good as people think," Boockvar said.

According to him, stocks would be 'much lower' if not for the additional liquidity provided by the Federal Reserve and European Central Bank. Based on earnings alone, Boockvar said, the gains in the S&P 500 aren’t justified.

Boockvar's comments run counter to a growing consensus on Wall Street. Goldman Sachs said last week, stocks presented a once-in-a-generation buying opportunity. Bank of America and Credit Suisse also upgraded their full-year forecasts for the S&P 500, and the CEO of BlackRock, the world's largest money manager, Larry Fink said investors should have a total allocation to stocks because of low valuations.

Boockvar isn’t saying avoid stocks entirely, instead, he says, in the low-rate environment investors should focus on hard assets.

"With that backdrop, you want to buy hard assets, commodity-based assets, energy stocks for example, gold, that's the big picture," he said. "So any pullbacks that you've seen in those groups, I want to buy. But you can't be too bearish because you have the Fed that says they're going to do everything they can to push up asset prices."

The Apple Factor

Boockvar said he was concerned about the risks of a correction in Apple’s stockand the impact that would have on the rest of the market.

On Thursday Apple’s shares rose to a new record high of $617.62. The stock makes up about 4.2 percent of the S&P 500 and 17 percent of the Nasdaq 100.

The gains are not likely to be sustainable, especially over the short-term, Boockvar said.

"Apple’s stock has gone parabolic," he said. "It's a phenomenal company, phenomenal earnings, phenomenal products, but every time a stock goes parabolic, it typically ends one way and that's sharply down."

Daryl Guppy, technical analyst and CEO of guppytraders.com, agrees that Apple's stock could face a severe correction.

"The key to Apple is this very, very strong parabolic trend line," he told CNBC Thursday. "The thing about a parabolic trend line is that when they collapse, they typically retreat 50 percent or even a hundred percent."

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