It is finally going to be a make or break earnings season for stocks. This is because the justification for record high stock prices that have been perched atop extremely stretched valuation metrics has been the following false assumptions: The hope that the Federal Reserve will not resume its interest-rate hiking cycle, the U.S. dollar stops rising, the price of oil enters a sustainable bull market and long-term interest rates continue to fall.
If all those conditions were in place, investors could continue to believe a turnaround in the anemic 2-percent GDP growth endured since 2010 was imminent. And, most importantly, that a reversal of the five straight quarters of negative earnings on the S&P 500 might be just around the corner. But even if they were perpetually disappointed in growth and earnings that didn't materialize, they could always afford to wait until the next quarterly earnings report because there just wasn't any alternative to owning stocks.
However, if earnings come in weak for the current quarter — which would be the sixth quarter in a row — that disappointment would occur in the context of a rising U.S. dollar, falling commodity prices, spiking long-term interest rates and a Federal Reserve that will most likely resume its hiking cycle in December. In other words, it would be game over for the equity bubble.
After all, market pundits have placed nearly all of the blame for the negative earnings string on a crashing oil price and a spiking U.S. dollar. However, during the third quarter, the WTI Crude price and the dollar were both very stable. And the price of crude was trading in the mid-$40 a barrel range for both the third quarter of 2015 and the third quarter of 2016. Therefore, if earnings don't bounce back now how can they be expected to improve in the fourth quarter and beyond, especially while the Fed re-commences its hiking cycle, which should cause the dollar to rise and commodity prices to fall once again?