Investors often get bogged down in following too many data points in trying to assess the future direction of stocks.

While looking at global macro factors right down to the minutest of details about a company’s products or services are important, one simple way to determine whether a stock is going to go up or down is to track the direction of a company’s earnings.

That’s because share prices track the direction of earnings 93 per cent of the time, in the case of the S&P 500, anyway.

Here’s some brief commentary from Canaccord Genuity’s Chief Market Strategist, Tony Dwyer, on the “summer of indigestion”, “peak everything”, and what’s important to remember.


Tony Dwyer, Chief Market Strategist, Canaccord Genuity

We have been in a macro and market transition punctuated by the rolling correction since the early part of this year.

The S&P 500 (SPX) has marked many new highs, while the equal weighted S&P 500 and Russell 2000 have been in correction/consolidation since early May and early February, respectively.

We have phrased the current period as “the summer of indigestion” that is similar to the fiscal, monetary, and economic transitions in 2004 and 2010 when liquidity and economic growth peaked following the initial market ramp off the recession lows.


Historically, these periods of transition suggest indigestion rather than something worse as we pass peak liquidity and economic growth.

 “Peak everything” causes indigestion vs. something more dire.

Our core fundamental thesis driven by credit remains very positive, and despite the likely peak in monetary and fiscal stimulus measures the historic amount of excess liquidity is already being put to work in production, which reinforces forward economic growth and solid EPS in the quarters and years ahead.

  • It is very important to remember that a positive core thesis is centered on the direction of earnings, because the SPX correlates to the direction of EPS, not the rate-of-change (Figure 1).
  • This means that absent a credit-based recession, any market indigestion caused by slowing in the second derivative of stimulus measures and economic growth rate should prove temporary.

We believe the drop in the longer-term U.S. Treasury yields has likely discounted any slowing in economic activity and transition in the Fed’s asset purchase program, while the non-Treasury credit market conditions remain very favourable.

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