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Low Expectations Give Illusion of Strong Earnings: Strategist

Big Data Download

The Dow had its biggest drop of the year on Thursday on concerns about the Federal Reserve’s plans to cut its long-running stimulus program. Investors are bracing themselves once again, with earnings season beginning in about two weeks.

Alec Young, global equity strategist of S&P Capital IQ, said, “Companies dumb down earnings expectations.” He expects companies to lower the bar and then come in and beat that number. Companies did the same thing in first quarter, he said.

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According to S&P Capital IQ, four times as many companies are cutting guidance as raising it. Historically, that figure stands at about two to one, Young said.

S&P Capital IQ tracks Wall Street consensus. Currently, consensus is looking for 3.5 percent earnings growth on a year-over-year basis, with revenue expected to drop by one percent. “It will be another efficiencies, cost-cutting type of quarter, not really driven by top line growth,” he said.

Young’s own forecast calls for earnings to come in around 6 percent higher than a year ago.

By year end, Young called for the S&P 500 to hit 1700 because “fundamental underpinnings are good.”

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