Story Highlights
We’re in an earnings recession, but one chart tells Chad Shoop not to worry about the market.
This chart tracks the “expectations vs. reality” battle in the stock market — and it’s looking nothing like it did in 2008.
Chad shares a sure way to take advantage of this battle, no matter what.
Expectation versus reality is a key battle on Wall Street. It’s the push and pull we witness day to day.
You see, investors have certain expectations for how companies are doing. Every three months they get a reality check.
That’s when companies present reports detailing their revenue and earnings for the quarter.
As the numbers come in, they either support or hurt those expectations. Investors react by buying or selling stocks.
To understand the stock market, you have to understand this battle … and have insights on what to expect so you can decide where to put your money.
Now, you also need to understand that the market is always looking ahead.
The incoming data adjust the expectations investors had on a stock or sector.
If the outlook is better than the current situation, then the stock market has room to climb higher.
That is the main takeaway to watch in the market.
And the best way you can keep an eye on it is with corporate earnings, not investors’ expectations.
Expectations vs. Reality: The Stock Market’s Battle Watch my video below to learn more about corporate earnings and investors’ expectations, and how they influence the stock market.
VIDEO
Companies announce their corporate earnings four times a year. Every quarter, they give investors an idea of how well they are doing.
Right now, earnings are not doing so well.
Since the beginning of the year, corporations have been reporting negative earnings growth. This quarter of 2019 is the third in a row to show that.
It’s only happened twice since the Great Recession of 2008.
It sounds like a dire time for the market. And it is a key reason stocks have been flat over the past year — corporate earnings are not growing.
But, as I have written before , an earnings recession without an economic recession is a positive sign for the economy.
There’s no sign of an economic recession at the moment. This gives us the all-clear to stay bullish in this market.
This is because the market is always looking forward. If things are improving, the market will continue to climb.
You can track this improvement by comparing expectations versus the actual results corporations report.
If the actual results are better than expectations, it means corporations are outperforming.
And that’s great news for investors like us.
This Chart Predicts a Positive Outlook for the Bull Market When the actual results are worse than investors’ expectations, then it’s time to run for cover because they can drag the stock market way down.
We haven’t seen negative earnings growth come in worse than investors’ expectations since the Great Recession. And it’s not happening today.
Take a look at this bar chart:
As you can see, the dark blue bars are actual results. The gray shaded bars represent investors’ expectations.
Right now, expectations are for a negative 3.8% decline in earnings.
As long as corporations can beat that in the third quarter, you have nothing to worry about.
The Difference: 2008 vs. Now When companies reported earnings in 2008, they were well below what investors were expecting.
Back then, it was a sign that things were getting worse in the real world.
But the market didn’t bottom until the end of the first quarter of 2009, which is when actual earnings and expectations were in line with each other.
It’s important for you to know that earnings data are confirmed on a delayed basis .
Right now, for example, we have an estimate for the third quarter, which ended on September 30.
We won’t have a clear idea of how good or bad actual earnings are until mid-November.
But earnings expectations are a useful tool that confirms or rejects a major move the stock market is going through.
However, if you trade on earnings like I do, you don’t even have to worry about it .
Trade Earnings With Less Risk Most investors get excited and try to bet on which direction a stock will go before the company announces earnings.
I wait until after the earnings announcement.
Then I use proven trends the stock is set to benefit from: either a continued rally or a drop lower.
By placing my trades after earnings, I already know how the actual earnings did compared to expectations.
This allows me to avoid the risk that comes with predicting earnings and create more consistent returns.
We are getting into the heart of earnings season in the coming weeks. If you want to jump on these opportunities, click here to learn more.
In the meantime, keep an eye on the “expectations versus reality” battle. Right now, all signs are predicting the bull market will continue higher.
It will pay to stay bullish.
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