JPMorgan’s Tom Lee: One Of The Best Stock Market Indicators Has ‘Decisively Turned Up’

By admin on August 3, 2012

Tom Lee

Everyone is down on corporate earnings right now. We’ve written about how recently, Wall Street has been lowering earnings estimates faster than any time in the last 13 years, excepting recessions, and investors are concerned about companies lowering earnings and revenue guidance for future quarters during this earnings season.

However, JPMorgan equity strategist Tom Lee suggests the negative tune on earnings could be changing, saying that the data has “decisively turned up.”

Lee points out in a note to clients today that the Citi Economic Surprise Index (CESI) has turned up in the past ten days after bottoming out and stagnating over the last six weeks, climbing from an index reading of -60 to -39.7.

So have earnings revisions, which have climbed from a ratio of 0.28 (i.e. 28 percent of revisions being upward) to 0.33.

Here’s a chart showing the historical correlation between the two measures and the recent increase in both:

EPS Revisions vs. Economic Surprise Index, 2012-08-03

Lee says that “historically, a rising CESIUSD has been associated with stabilizing EPS revisions” and that for this reason, “bottom line, we would recommend investors be buyers of the dip.”

Lee says what’s driving the upturn are improving construction numbers and lower oil prices, the combination of which he calls a “powerful dynamic” that “investors need to appreciate.”