What's Next?

For me then, the next question is, what could cause such a pullback? Why would stocks give up double-digit gains?

Potential Causes of a Correction

As usual, there are any number of reasons one could espouse here. Not the least of which is inflation becoming a problem. Just this week we learned that the Fed's preferred measure of inflation - the Core PCE (Personal Consumption Expenditures), grew by 3.1% year-over-year, which was the most since July 1992. And the monthly increase of 0.7% (which was above expectations) was the highest since October 2001.

Another area of concern could be interest rates. I can argue that yields have largely priced-in the current economic/inflation scenario. However, should inflation continue to "run hot" for longer than the consensus currently expects, we could easily see rates resume their rise. As former Dallas Fed President Richard Fisher said last week, "the direction of yields is higher," the only question is at what pace rates will rise.

What About Earnings?

Then there is the earnings picture. There can be no argument that earnings have come in well above expectations. And the bottom line is the current parade of corporate profits has been impressive. Yet, despite the really strong reports, stocks have largely yawned in response. This tells me that the good news was already "baked in" to prices.

Remember, stocks look forward - not back. The stock market is...everybody now... "A discounting mechanism of future expectations." So, the key to the future direction of stock prices could easily be earnings. As in, if earnings growth can continue once the uber-easy year-ago comparisons are removed.

On that note, take a look at the chart below, which illustrates the Consensus Estimates for the S&P 500's GAAP (Generally Accepted Accounting Principles) earnings. The chart is updated weekly to illustrate how analyst estimates change over time.

I highlighted this chart in my May 10th report, which was titled, "A Chart That Makes Me Say, Wow!" At the time of the report, Consensus Estimates had surged from the $155 zone up over $175 in a very short period of time. A move, that did indeed make me say, wow.

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The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should ...

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