Stocks Outlook - Thursday, June 28

Thoughts

1. Economic Surprise Index is about to turn negative. Not medium-long term bearish for the stock market.
2. Corporate buybacks are putting a floor under the stock market.
3. Q2 earnings season is coming up in the second half of July. The stock market’s short term weakness is limited in terms of TIME.

1 am: Economic Surprise Index is about to turn negative. Not medium-long term bearish for the stock market.

A lot of financial professionals have been looking at the Citigroup Economic Surprise Index recently, which is about to turn negative.

To some professionals, this means that the U.S. economy is starting to “roll over”, which is medium-long term bearish for stocks. They’re wrong.

The Citigroup Economic Surprise Index doesn’t even measure whether the economy is deteriorating or improving (factually). It just measures whether the data is beating or missing analysts’ expectations. There’s a big difference between these two things.

With the Economic Surprise Index headed towards zero, this just means that analysts’ expectations have finally caught up with that of reality. Reality is no longer consistently beating analysts’ expectations.

As you can see, it is very common for the Economic Surprise Index to go negative.

Factually speaking, the U.S. economy is still improving and shows no signs of rolling over (see charts).

The economy right now isn’t medium-long term bearish for the stock market. It’s a medium-long term bullish factor for the stock market.

1 am: Corporate buybacks are putting a floor under the stock market

It’s hard to understate how big a medium-long term bullish factor corporate buybacks are right now for the stock market. The following chart demonstrates the intensity of corporate buybacks this year.

Ed Yardeni expects corporate buybacks to continue at a solid pace throughout the rest of 2018. Buybacks recently set a record in Q1 2018

Corporate buybacks have put a bottom under the stock market year-to-date in 2018. Corporate buybacks have surged whenever the stock market fell. I expect this trend to continue throughout 2018.

1 am: Q2 earnings season is coming up in the second half of July. The stock market’s short term weakness is limited in terms of TIME.

The stock market might fall a little more in the short term, but the key point is that this short term weakness is limited in terms of TIME.

Q2 earnings season is just around the corner in 2 weeks. Corporate America as a whole generally beats earnings expectations because they know how to play the earnings game. Remember in Q1 2018 how everyone was afraid that the bar was set too high? Well turns out companies STILL beat earnings expectations by the most since 2009. Companies beat their earnings expectations en masse even though the bar was set very high.

The stock market doesn’t always go up during earnings season, even when companies beat their expectations. But the historical pattern has been that if the stock market goes down before earnings season, it’ll go up during earnings season.

So if the stock market continues to go down right now, it’ll probably bounce during Q2 earnings season (second half of July).

Outlook

Here’s what I think will happen based on my discretionary outlook.

1. 2018 will trend higher but will also be a choppy year.
2. The S&P 500 has approximately 1-2 years left in this bull market.