If real estate is all about location, location, location… then the stock market is all about earnings, earnings, earnings.
What drives the market is the growth of earnings from one quarter to the next, and from one year to the next. The chart below, courtesy of Zacks Investment Research, shows the trend of earnings estimates by Wall Street analysts, over the past three months. It’s clear that earnings estimates have come down, and the latest figure for the current quarter is a mere shadow of its’ former self.
This is why the market will continue to struggle this year. Without a healthy growth rate for earnings, the only thing that will keep the stock market going is hope. Hope and a belief among that the worst is behind us and earnings next quarter will be higher. But is this realistic? We have two problems that are clear and present. First is oil prices. While it’s true that cheaper oil helps consumers and industrial users of energy, it hurts the earnings of oil producers. This is a huge sector of our stock market. Earnings in the oil sector are coming down… way down.
The other problem is the financial sector. Big banks, brokerage firms, asset managers, and mortgage lenders are all struggling right now. The financial sector is another huge contributor to the earnings of the stock market. As long as the energy and financial sectors continue to revise their earnings estimates lower, the stock market will continue to struggle in 2016.