Next week, investors will be greeted with third-quarter earnings.
Alcoa (NYSE:AA) will kick things off on Tuesday, followed by PepsiCo (NYSE:PE) on Wednesday and JPMorgan Chase (NYSE:JPM) and Google (NASDAQ:GOOG) on Thursday.
Sam Stovall, chief equity strategist at Standard and Poor’s, said “expectations surrounding … Q3 earnings are now quite low [and possibly offers] this rally the catalyst for near-term propulsion.”
From Monday’s closing, the S&P 500 already rallied over 5 percent by Friday’s closing.
He noted that Wall Street analysts have cut their earnings per share growth estimates, year-on-year, to 13.05 percent from the July 11 estimate of 16.94 percent.
Fourth quarter earnings growth estimates have also been trimmed to 13.32 percent from 15.74 percent on July 11.
“Analysts expect the current global economic weakness to continue in the quarters ahead,” said Stovall.
As analysts have trimmed their earnings expectations, the markets have also priced them in; the S&P 500 declined 12 percent since July 11.
If earnings beat these lowered expectations, however, U.S. stocks will likely rise.
There is one more reason Stovall is bullish.
“History shows (but does not guarantee) that an oversized price decline in one quarter is typically followed by a sharp advance in the next,” he said.
In the third quarter, the S&P 500 plunged 14 percent, turning in its worst performance since fourth quarter 2008.
Stovall, however, is not long-term bullish, calling the current rally a “counter-trend” rally.
He believes the S&P 500 would drop into bear market territory “either later this year or during the first part of 2012.”
One common metric of a bear market is falling 20 percent from the high. From the May 2 high, bear market territory for the S&P 500 would be 1,096. The index closed at 1,155.46 on Friday.