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Earnings point the way higher for stocks: Trader

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Trading Nation: Will stocks break out?

The market has long been stuck in a remarkably tight trading range, with the remaining in a mere 95 point corridor since the first week of February. But according to S&P Capital IQ's equity chief investment officer, Erin Gibbs, earnings and valuation point the way out—and up.

"From a valuation perspective, the S&P 500 is trading at six-month lows," Gibbs wrote to CNBC. "The index has basically hovered between 17 times and 17.8 times forward earnings (with a couple very brief spikes) since February. Right now, the index is at 17 times, right at the bottom of the range."


Gibbs is referring to the most popular valuation metric for stocks, forward P/E, which compares the current price to analysts' estimates of total earnings over the next 12 months.

"Given that we don't expect a huge drop in the 'E,' I think the index is due to move back up toward the top of the range."

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Gibbs additionally pointed out in a Friday "Power Lunch " segment that companies were able to produce much better earnings growth than anticipated in the second quarter, with profits coming in about flat from the year prior, compared to the expectation of a 4 percent drop.

Still, she doesn't see anything big occurring in the next few weeks.

The move she expects "may not happen until September," she said. "We have to get out of the summer doldrums first."