Eurozone Certainty: All We Need for
the Stock Market to Jump Further

With more certainty from European policymakers over the near term, Mitchell Clark doesn’t see any reason why the stock market won’t tick higher going into 2012.If the stock market is going to find itself some sort of new base, eurozone politicians will have to come up with some concrete, unified action at their upcoming summit. There are going to have to be more austerity measures and cohesive, political will to redefine the terms of their monetary union if the euro currency is going to survive. As for the stock market, while no one expects runaway capital gains in 2012, there is solid potential for a reasonable gain in share prices if other shocks don’t rain on the parade. Corporate earnings are strong enough to support higher share prices in my view.

We’ve seen a slight improvement in economic data recently. We also have stable, low interest rates, a reasonable inflation outlook, and solid corporate earnings. With more certainty from European policymakers over the near term, I don’t see any reason why the stock market won’t tick higher going into 2012. The level of 1,300 on the S&P 500 Index is a definite possibility if things don’t fall apart on the sovereign debt issue.

In this scenario, I still see larger-cap, higher dividend paying stocks as being the market leaders next year, because they have the strong balance sheets and the pricing power to accelerate earnings. Big companies still have capacity to fill and they can meet any increase in demand without having to spend much on new plant, equipment or employees. The outlook for corporate earnings next year continues to be very good.

Third-quarter earnings season was usurped by the sovereign debt crisis in Europe, but the upcoming fourth quarter may be the relief that stock market investors are looking for (see If Europe’s Fixed, Stocks Should Resume Their Upward Trend). Third-quarter numbers were good and a lot of corporate earnings beat Wall Street consensus. For the most part, companies played it safe regarding fourth-quarter and 2011 visibility, reiterating their previous guidance for the year. With so much uncertainty lately, I suspect this prudence will set the stage for some big surprises in corporate earnings. Again, the stock market is behind corporate earnings, because of a lack of confidence due to sovereign debt. Larger companies have been doing their part, particularly in the corporate/industrial economy and balance sheets just keep getting better and better with the cost of debt so low.

I can’t say where the stock market will end up in 2012. There are too many potential shocks that could bring down the system. I do expect, however, that, like this year, corporate earnings in the first half of 2012 will be robust and that the stock market could move incrementally higher based on improving fundamentals in the U.S.economy. The first key item the stock market needs is more certainty from the eurozone. The second key is corporate earnings (employment and the housing market will have to wait for things to trickle down), for which the outlook is very good at the moment.