Despite this fading earnings momentum and the likelihood that its cause (political uncertainty) continues into the fourth quarter, analyst consensus estimates are forecasting low-teens growth for the fourth quarter and into 2013. These figures seem overly optimistic to us; we are expecting only single-digits earnings growth at best. Although this would require analysts to lower their estimates, stocks' best performance has historically come when earnings growth is slightly negative to mid-single digits. Thus, we do not expect decelerating earnings growth to end the cyclical bull market; instead, we expect the S&P 500's QE-fueled 38% annualized trend from June through September to fall to a more moderate and sustainable pace.
David Fuller's view I have previously mentioned the historical evidence that it takes five to seven years on average to recover from a credit crisis recession.
If we count the beginning of the recovery effort from the end of 2008, which seems reasonable, then the fifth year of this cycle commences in 2013.
Therefore, with the QE taps open at many leading central banks, and less evidence that a widely feared global deflation is taking hold, then it seems reasonable to expect some upturn in global GDP next year. I even think the ECB expects some economic recovery in Europe in 2013.
In the category of what could possibly go wrong, perhaps I should add, provided commodity price inflation does not revive before global GDP.