US earnings season has begun, and cautious analysts are busy cutting estimates. In January, annual growth of 4 per cent was projected; by last week, FactSet noted, a 1.6 per cent annual decline was predicted.

But the US earnings picture may be less concerning than Europe’s. FactSet notes this is the fourth time in the last 12 quarters that analysts have projected a year-over-year decrease, but an actual decline occurred on just one occasion.

It's something of a Wall Street ritual to lower estimates as the earnings season approaches, allowing companies to then beat expectations (a beat rate of over 60 per cent is quite common). As for Europe, Citigroup recently noted shares now trade on 17 times trailing earnings, compared to a multiple of 10 in late 2011.

The current reading is the highest for over 10 years, and above both the post-1980 and post-1990 average. In terms of forward estimates, the cheapest quintile of stocks trade just above the highest levels seen over the past 25 years (that is, the cheapest stocks are not as cheap as usual). Depressed European earnings have much more room to grow than American earnings, but investors need to see companies deliver sooner rather than later.


U-turn for emerging markets
The short-term trading opportunity in emerging markets has passed, judging both by sharp price rises and the about-turn in sentiment, as measured by Merrill Lynch's latest monthly fund manager survey.

Back in February, a net 29 per cent of managers were underweight emerging markets – a record reading indicating excessive bearishness, and setting the scene for the double-digit rally that followed. Today, only a net
2 per cent of managers want to underweight emerging markets, and the unwinding of pessimism indicates this high-probability contrarian play could be nearly played out. Managers believe the investment case for emerging markets still remains intact, a net 55 per cent saying it is the most undervalued region – the highest reading ever.

Ironically, a net 44 per cent are now overweight India, up from a net 13 per cent underweight in March, but investors remain underweight Brazil. India is one of the world’s most expensive markets, Brazil one of the cheapest. As always with the Merrill survey, contrarians will be rolling their eyes.

Bull market has room to run
A separate takeaway from the Merrill survey is that the global bull market has room to run, given cash levels remain high at 4.6 per cent – slightly less than last month, but near two-year highs.

As Merrill strategist Michael Hartnett remarked in an earlier note: "High cash, low leverage . . . bull markets don't end this way". Nor do they usually end, he added, with tobacco being the only subsector at an all-time high.

Merrill’s own Bull & Bear index has a current reading of 6.2 – nowhere near contrarian buy levels (1.8), but still some distance from the bullishness that triggers contrarian sell signals (8).

Hartnett suggests a double-digit correction is more likely in September, when the Federal Reserve likely ends its bond-buying programme and expectations of rate hikes begin to grow. Precise predictions
of market movements should always be taken with a pinch of salt. However, Hartnett's basic premise is a sound one – recent market sentiment is not indicative of a market top.


Investors haven't a clue
Despite decades of education, most investors still haven't a clue. The typical investor earned just 5.02 per cent annually over the last 20 years, according to the latest annual report from Dalbar, compared to 9.22 per cent for the S&P 500. Although the gap narrowed over the last decade, it actually widened in 2013.

“Attempts to correct irrational investor behaviour through education have proved to be futile”, said Dalbar; this approach has now been “totally discredited.”

The problem is partly that investor expectations are too high, most seeing the market performance as a minimum to be attained.

Dalbar says advisers should set expectations below market indexes, monitor investors’ risk tolerance, control exposure to risk, and present forecasts in terms of probabilities. Good advice, but with humans being the emotional creatures that they are, it’s likely the “buy high, sell low” approach will remain all too common.

Smartphone ban bad for prices
Banning people from using their smartphones while driving may save lives, but it's not good for stock prices.

A new US working paper finds that in the days immediately after restrictions are introduced in a particular state, there is a decline in Google searches for local stocks, a "dramatic" decline in their trading volumes, and a "negative abnormal" share price return of 2.4 per cent. The reduction in trading activity persists for at least two quarters, with reductions smaller in states where the laws are less strict.

The study can be viewed at http://goo.gl/UiNZVa