Do Better-Than-Expected Earnings Predict the Same for GDP?

We said in an earlier blog that better-than-expected earnings combined with better-than-expected Gross Domestic Product (GDP) could be the catalyst for a new up leg for stocks. At the moment, the Dow Jones is stuck in a trading rage between about 8,000 and 9,000. The recent uptick in the markets has brought us back to about where we were in mid-June. With earnings season winding down, we don't think the better-than-expected earnings by themselves will be good enough to drive stocks toward the 10,000. In essence the safest call on the market in the near term is for a zig zagging sideways movement for a few months. However, on Friday the government will release figures on second quarter US GDP. If second quarter GDP figures would come in close to positive territory, we believe the animal spirits would take over again and the markets could push to 10,000 very quickly. It may surprise you to learn that the consensus estimate of economists surveyed by Bloomberg is for negative 1.5% GDP growth for the second quarter. That number was closer to negative 2.5% just a few months ago. It has improved due to better economic data, as well as significantly better international trade data. If the actual GDP growth for the quarter were to come in at negative .5% or, cross your fingers, perhaps zero, that would cast a whole new light on the speed of recovery. Almost all analysts have written off the consumer, saying that they have become savers instead of spenders. But there is a little problem with this pessimistic view of consumers: The consumer discretionary stock market sector has been the biggest surprise in the second-quarter earnings derby. We do not have an official estimate of second-quarter GDP, but in keeping with our call for better-than expected earnings, we believe the most likely scenario is that GDP will be better than expected as well. If that happens, as we said earlier, stocks will react favorably in the coming months.