Anyone trying to solve the riddle of how corporations can be enjoying a sharp rebound in profits even as the economic recovery remains so weak won't have to wait long for answer, says David Rosenberg, the presciently bearish chief economist and strategist at Canadian asset manager Gluskin Sheff.
"The weakness in the incoming economic data in the U.S. will soon show through in reduced corporate guidance and more downward earnings revisions," Rosenberg told clients in his Wednesday report. "Think of [Federal Reserve Chairman Ben] Bernanke as CEO for USA Inc. and consider that he just cut the forecast for the second time in six weeks. These pose near-term cyclical risks to the equity market outlook."
Rosenberg expects S&P 500 ($INX) third-quarter and fourth-quarter operating earnings to come well short of analysts' average forecast -- as well as what the market is currently pricing in.
"So, earnings, which recently trended up towards $80, are settling into a $70-$75 range for the coming year," Rosenberg says. What does that mean for stocks? Bad news. Based on Rosenberg's figures, the S&P 500 is set to fall more than 20% as the V-shaped recovery in corporate earnings comes to an abrupt end.
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