Twelve companies from the S&P 500 are reporting earnings this week. The results will start coming faster next week which is why I said that was the beginning of earnings season. This means FactSet’s chart of bottom up expectations has moved to tracking Q4 earnings estimates. As you can see from the chart, estimates have been stagnant for the past two months during the time they collapsed for Q3. The skeptics of the stock market will claim the market shouldn’t rally when estimates are stagnant, but I disagree because stocks don’t immediately rally when estimates come out. For example, when estimates for 2020 earnings start becoming public, stocks won’t rally. Therefore, earnings growth declines aren’t bad as long as the deceleration isn’t that sharp and the gains in stocks aren’t too high. Q4 earnings are expected to grow 11.1%. That would be an acceleration from Q3 even if there’s a slight decline in the next three months. When Q2’s results came out, Q4 expectations came down. If Q3 results are bad or the guidance is bad, the Q4 estimates will fall much more sharply as the results are closer to coming out, meaning estimates are about get much more accurate.

The biggest question of the year for the Fed has been when wage growth would accelerate and push inflation higher so the Fed can raise rates. As I have said, this current environment is great for stocks. Investors need to figure out what is keeping a lid on inflation and hope it continues. Obviously, it would be bad if there was a recession and the Fed couldn’t cut rates, but it seems unlikely that a recession would occur without the Fed being hawkish, the yield curve inverting, or high inflation. One way to measure the slack in the labor market is to look at the number of workers who are working part time for economic reasons. This is the number of workers who want to work full time, but can’t find a job so they work part time. Generally, part time work isn’t compensated as well as full time work. However, some independent contractors do well. Independent contractors can be part time or full time, but mostly the work is somewhere in between. It’s a full time job which is inconsistent because contacts can be amended or terminated whenever they end which is usually in the near future.

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