We are getting into the heart of earnings season. The story so far: Fewer companies are beating estimates, and by smaller margins. That doesn't sound like good news. And it gets worse: Analysts are betting, and the market seems to agree, that the first half of the year will see no earning growth at all and will likely be slightly negative. S & P 500 earnings estimates 2022 Q4: down 3.0% 2023 Q1: flat 2023 Q2: down 1.3% 2023 Q3: up 4.3% 2023 Q4: up 10.5% Source: Refinitiv Not great news on the earnings front! And... the market is rallying. I've spoken often in the past week about the technicals that are leading the market higher. Because market sentiment was so negative ending 2022, a lot of investors are still not back in and are positioned "light." The pain trade — the trade that would cause the greatest discomfort to the most active participants — is therefore for the market to rally. This is exactly what has happened. More than 50% of the constituents in the S & P 500 are above their 200-day moving averages. That's not a bull market, but it's getting there. To get the technicians really excited, you need to get above 60%, but we are getting there. The NYSE advance/decline line, which measures the daily move of advancing stocks over declining stocks, recently passed its June and August highs from 2022. Most importantly, the S & P 500, in the 4,025-4,050 range, is now on the verge of breaking a long-term downtrend of lower lows and lower highs that goes back to the historic market top in January 2022. All these technical moves are necessary but not sufficient to really get the market going. The macro environment needs to improve. The broad bet is that 1) the Federal Reserve will soon be ending its rate hikes and could plausibly begin reducing in the second half, and 2) the China reopening will provide a significant tailwind to global stocks. That's why all the earnings growth is in the second half of the year. The bet is that the first half of the year is flat on earnings, and the second half improves. That is a plausible scenario, providing China successfully reopens and the U.S. avoids a deep recession. That is why the market has been rallying. Remember, the stock market is a discounting mechanism to figure out: 1) a future stream of dividends and earnings, and 2) how much anyone is willing to pay for that future stream (that's the price-earnings ratio). Stocks are skating to where investors as a whole think the puck is going to be six to 12 months from now, not where it is now. If you doubt this, just look at two different companies commenting on China. Here's 3M earlier Tuesday: "The slower-than-expected growth was due to rapid declines in consumer-facing markets — a dynamic that accelerated in December — along with significant slowing in China due to Covid-related disruptions." Now here is watch company Swatch Group: "After the end of Covid measures, consumption quickly recovered, not only in China, but also in the surrounding markets of Hong Kong SAR and Macau. In addition, lifting of travel restrictions in China will revitalize sales in tourist destinations. The sales growth in January in China reinforces the Group's expectation to aim for a record year in 2023." What do you think the market is trading on: 3M's backward-looking comment on Covid-related disruptions, or Swatch talking about the China reopening and a record year in 2023?