One of the few bright indicators I follow has been my Expectation Ratio – an indicator measuring analyst’s estimates versus actual corporate profits. When the indicator is rising it means that analysts are cutting their expectations at a rate that is faster than the actual decline in corporate profits. In essence, it measures the potential of corporations to outperform analyst expectations.
One of the primary ingredients of any bull market is stable earnings growth and low expectations. We are certainly beginning to reach levels where corporations can begin to outperform expectations. Now all we need is a real trough in earnings. Don’t expect that to come this quarter though. I think we have at least two very difficult quarters worth of earnings ahead of us…
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Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.