What will be the markets new theme

A pullback or sideways action would be good for further gains. The market will turn its attention very soon to the next earning season. Expect breakouts in anticipation of good earnings.

Stocks which have not responded to good earning in last quarter due to overall market negativity will start to breakout or accelerate their moves before earning.

The earning trends continue to show no hint of rcession in near future.

Earnings growth for the S&P 500 is expected to remain solid for both this year and next, on both a median firm basis and on a total net income basis. On a median basis, growth for both the current and next fiscal year is expected to be 12.80%. Both growth rates have held steady over the last several weeks. On a total earnings basis, the growth rates are more skewed towards this year, at 15.2% versus 10.4% next year. While the total growth rate is certainly predicted to slow, by no means is a 10.4% year-over-year growth rate tantamount to predicting a near term recession.

We would point to one methodological point however, which could be inflating the expected growth rates. The rates are based on the forecasts of EPS, and then multiplied by current shares outstanding to get total earnings. Recently firms have been pumping enormous, and unprecedented, sums into share repurchase. In the first half, over $216 billion was spent by S&P 500 firms to buy back their own stock. The shrinks the number of shares outstanding and boosts the EPS growth rate. Add in dividends paid out and over 80% of earnings were returned to shareholders rather than reinvested by the companies.

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