- According to Fundstrat, the stock market could end the year at an all-time high as disappointing earnings do not trigger a sell-off.
- Investors have weathered a bad news storm, and that bodes well for the stock market.
- "Investors are penalized much less for lost income," said Fundstrat's Tom Lee.
The stock market could hit year-end highs as investors buy too much bad news, Fundstrat's Tom Lee said on Friday.
This suggests that disappointing earnings results have yet to trigger a sell-off in stock markets, with the S&P 500 continuing to gain about 6% year-to-date. And that may surprise currently indifferent investors and strategists.
"There are people saying earnings are the next shoe, but EPS estimates have been [falling] for months." That makes how stocks react to BPA results all the more important," Li said.
Also, investors aren't penalizing companies that don't take earnings estimates into account today, as they did a few months ago.
So far, companies that missed fourth-quarter earnings are down an average of 1 percent, according to Fundstrat data. The revenue estimates for the third quarter of 2021 are much better than the average 2.5 to 3 percent decline for underperforming companies.
Additionally, the two sectors that produced the best earnings for the year were the same sectors that posted the largest negative earnings changes in the fourth quarter. Communication Services and Consumer Choices.
"Investors punish failure very harshly," Lee said. “Again, it's cruel to single out the worst EPS news for 2023. That doesn't mean APS outages are a good thing, but it does show that many of them come at a cost.
Improved earnings reaction gives Lee confidence that multiple bullish signals from stock markets in January will help the S&P 500 climb another 18 percent this year to 4,800, the target for January 2022.
The fact that the majority of investors are still weak and haven't made highs that could yield profits also supports the stock's upside potential this year. This suggests continued negative investor sentiment and Wall Street's year-end average price target of 4050, which is 1% below current levels.
“When equity markets weaken, it is 'extraordinary'… Most analysts and strategists have met the year-on-year rise in share prices with skepticism and warnings of a 'bear market trap'… But the above analysis shows the internal structure of the market is a different story. If stock markets contradict the structure, it might be time to revisit this story," Li said.