Fourth-quarter earnings season starts soon, but everyone is focused on 2017 guidance. The big problem: no one knows how to model the Trump rally.
Here's the good news: fewer companies are guiding down for the fourth quarter.
Now the bad news: what we care about is 2017 guidance, and there's a good chance that most companies will not be doing any dramatic fist pumps about earnings in the new year.
Here's Lindsey Bell, CFRA's Investment Strategist and chief wizard of earnings, on what she thinks will happen: "We expect guidance will be unlikely to move higher in the near term and could even be reduced from the current estimate... disappointing investors and potentially causing a pullback or pause in the market."
Huh? How could that be? All this gushing optimism is for nought, at least for the time being?
The question is, how much will earnings improve? How much will this magical potion of tax cuts/less regulation/fiscal stimulus really impact earnings?
We don't know and that's why analysts have been reluctant to raise 2017 earnings estimates. Current estimates for S&P earnings in 2017 are at roughly $131, about an 11 percent improvement over 2016, but essentially unchanged for the past several months.
That's an important point: no one is raising 2017 estimates, at least not yet.
More importantly, because the stock market has risen roughly 6 percent since the election, but 2017 earnings estimates have not risen. Stock multiples have expanded, from roughly 16 times 2017 earnings for the S&P 500 to a little over 17 times. This is high by historical standards, but optimists insist it is justified because earnings will be improving later in the year.
Maybe. There's plenty of back-of-the-envelope guesses, just not many facts. Leon Cooperman, on our air Thursday, noted that current 2017 earnings for the S&P 500 is at $131 or so but "We could see earnings at $140" if the full package of tax cuts and infrastructure come through.