Summer Doldrums. Somebody Agrees With Me.

IndexUniverse.Com posted last week a Sun Trust Robertson Humphrey Report on what they expect over the summer. Their conclusions are similar to mine. Which of course is why I'm giving you an excerpt! :-}
Excerpt with Green Highlights:
• The market’s momentum seems to have stalled over the past few weeks, as stocks continue to digest the roughly 40% rally from the March lows. Confidence that the Armageddon scenario is likely off the table supported much of these initial equity gains, but now investors are searching for tangible signs the economic recovery is under way, as opposed to merely a decline in the rate of change of disappointing data.
• With increased expectations versus what will likely continue to be a mixed bag on the economic front, at least in the short term, we suspect equities will be confined to a trading range in the near term as investors await the next catalyst. From a technical perspective, we see resistance for the S&P 500 at 956 (recent peak) and estimate downside support at 880, then 825.
• Indeed, the process of two steps forward, one step back is to be expected, as stocks almost never move up in a straight line...........
• That said, we believe the S&P 500 is likely to see higher levels later in the year, once investors gain greater confidence in an economic rebound and the corporate profit picture becomes clearer.
• Indeed, our SunTrust Chief Economist, Gregory Miller, is becoming more convinced that the economic recovery will prove to be stronger than the current consensus view. He estimates the economy will grow at an average annualized pace of 2.8% in the back half of this year, followed by average increase of 4.2% in 2010. His projections are stronger than the current consensus that calls for a 1.3% rebound in 2H09, and a 1.8% rise in 2010, according to the latest Bloomberg survey. Miller attributes much of his more optimistic projection to the roughly $400 billion, or about half, of the $787 billion of the fiscal stimulus package that the administration expects to deploy from October of this year through September 2010.
• From a stock market perspective, a better than expected economic environment could lead to upside earnings surprises later in the year, or at least stabilization of the negative revision trends that have been a regular occurrence during most of the recession.
• In fact, we are already seeing signs that earnings may be bottoming. One way we measure this is by tracking the percentage of S&P 500 companies that are seeing their current-year earning estimates raised. .....it appears they overshot to the downside, and in many cases they are now revising their projections higher. Over the past three months, 45% of companies within the S&P 500 have seen their earnings estimates increased, which is up substantially from just 9% in February.
This change is also being reflected in the Street’s aggregate S&P 500 earning estimates for 2009 and 2010, which appear to be bottoming (a portion, but not all, of the recent uptick was a result of the removal of General Motors from the index, which was projected to have a large loss). Also worth noting is that despite the substantial rise in crude oil from $45 at the end of last year to its current price above $70, analysts have only raised earnings estimates for 11 of the 40 companies in the energy sector. As long as oil prices do not collapse, we believe analysts will eventually have to adjust their numbers higher to reflect this new reality, helping to support the overall earnings outlook.
The reason we place so much emphasis on earnings trends is that at the end of they day, investors buy companies based on their profit potential. And when confidence in a company’s outlook increases, there is a secondary and important impact beyond the revised growth rate. That is, investors typically require less of a margin of safety when buying stocks since they have a better handle on the true earnings power, which can ultimately help to support higher P/E ratios.
Bottom Line:
Investor expectations have increased from the low levels seen earlier this year when fears of the next Great Depression were elevated, and now it appears it will take more than “less bad news” to move the needle forward on the stock market. In the near term, economic data will likely continue mixed, thus we suspect equities will be confined to a trading range as investors await the next catalyst. We believe that a stronger than expected economic recovery in the second half should help support earnings, which already are showing signs of bottoming, and will be a key factor that ultimately serves to drive equity prices above the recent range—but patience may be required.
http://www.indexuniverse.com/sections/research/6063-equities-set-for-summer-hibernation.html?Itemid=7