It is a generally accepted belief on Wall Street that U.S. corporate earnings growth in 2007 will fall short of the blistering pace set over the last four years. This belief is probably true, but will the earnings slow-down be enough to bring the Bear out of hibernation?

I don't think so and my reason for saying so was spelled out in my essay of October 13, 2006. This essay, called the "Bull/Bear Market Indicator," said that the key to maintaining a Bull Market Scenario is rising corporate earnings. VectorVest uses the S&P 500 to track corporate earnings and documents its findings each week in the Investment Climate section of these Views. The weekly data from the Investment Climate may be seen graphically by clicking on Graphs in the Main Tool Bar, clicking on Market Climate Graph; then checking S&P Earnings and S&P Earnings-VV. (Please remember to uncheck the indicators you don't want to see.)

This graph shows that S&P 500 earnings have risen in virtually a linear fashion over the last four years. That's very good. When one computes the percent gains year-over-year, however, we find that they have gone lower and lower each year. This phenomenon reflects the mathematics of dividing a constant number by an ever larger denominator. It also reflects the challenge facing corporate CEO's who are trying to grow earnings at constant or higher rates. The VectorVest indicator, shown in the lower portion of the graph, also reflects decreasing earnings momentum. But not to worry, as long as earnings are rising, this indicator will stay above 1.00 and we will have a Bull Market Scenario.

Referring back to my essay of October 13, 2006, I said we needed to see whether Dr. Bernanke lowered interest rates in time to sustain the Bull market or waited too long and let the economy go into the tank. So far he hasn't lowered interest rates and this was causing some consternation among investors. Recent, favorable economic data, especially lower oil prices, now suggest that the economy will do OK. Although a reduction in interest rates is not imminent, investors seem to have accepted Dr. Bernanke's failure to lower interest rates and are comforted by the hope that lower oil prices will serve the same purpose of keeping the economy going.

Unfortunately, petroleum companies have already begun to warn of lower earnings. Even though their contribution to last year's earnings gains was huge, a good portion of their earnings shortfall will be made up by higher earnings of their customers. Therefore, I do not expect the Bull/Bear Market Indicator to go below 1.00 soon. So sit back, relax and enjoy this quarter's Earnings Season.