For Earnings, How Soft Is the Economy?

Earnings season begins, the number one question: how serious is the June "soft patch " in the economy?

Right now, stocks are in the middle ground: they are discounting a stall in the economy, but they are NOT discounting a double dip. What's a double dip? Opinions vary, but right now earnings estimates for the full year are hovering around $80 for the full S&P 500; in a double dip, they could quickly go down to $65 or worse.

Based on a roughly 13 times forward earnings (about where we are now), that could drop the S&P 500 to 850 or lower, well below the 1076 level we are at right now.

But that's not where we are right now: the bet is that CEOs are just as uncertain on jobs and housing as Wall Street is, but they are not outright pessimistic. Uncertainty is not gloom, so the bet is few companies will be aggressively raising guidance, but most will attempt to guide to earnings levels that are slightly below analyst consensus.

That's what May and June was all about: repricing second half earnings expectations

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