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Earnings beats will give the record rally credibility, market bull Sam Stovall predicts

Why earnings season will be the market's moment of truth

CFRA Research's Sam Stovall expects the market's record rally to earn its street cred.

According to Stovall, the process should begin this week as the nation's biggest companies report 2019 fourth quarter results.

"We need to actually see a positive jump for the fourth quarter of 2019 and then start to see some optimistic guidance for the coming quarters," the firm's chief investment strategist told CNBC's "Trading Nation" on Monday.

He believes the probability of that scenario is high.

"The bar for the fourth quarter is actually set relatively low," said Stovall. "I always like to that say it's very hard to injure yourself falling out of a basement window."

Earnings estimates are still depressed, and it appears they're getting worse. Refinitiv reports Wall Street expects Q4 earnings per share to fall 0.7% from year-ago levels. They were down 0.3% on Jan. 1.

However, Stovall suggests investors shouldn't get too worried.

"Q3 was the 31st consecutive quarter in which the reported EPS change exceeded the estimated EPS change. In addition, in those prior 31 quarters, actual results outpaced forecasts by an average 3.8 percentage points," Stovall wrote in his earnings outlook research note. "So should history repeat itself in Q4, and there's no guarantee it will, EPS growth may come in closer to a 2.0% advance than a 2.0% shortfall."

Stovall speculates the strongest growth will come from financials, health care and utilities while consumer discretionary, energy and materials cope with record double-digit declines. Indeed, J.P. Morgan Chase on Tuesday kicked on earnings season for financials with a huge earnings beat.

Stovall's year-end S&P 500 target implies stocks will move deeper into record territory.

"By year-end, we're looking for 3,435 which implies about a mid-7% price appreciation from where we closed 2019," Stovall said. "Add a couple of percentage points for total return, and we're approaching the 10% level."

The S&P 500 on Monday closed 4.5% below his target.


Earnings season will give credibility to record highs: Sam Stovall