For the past two months, I have made the argument that above consensus macro economic data would lead to above consensus earnings results and that investors would see the evidence of this as 2Q09 earnings season got underway. Based on the reports issued thus far, this argument has won the day as above consensus earnings results have matched the above consensus macro economic reports preceding them. Accordingly, stocks responded.

The second part of my argument was that such positive data would eventually encourage bottom up analysts (along with many investment strategists and top down economists) to reassess their more cautionary views and begin to raise their full year earnings expectations for this and next year. This, too, has begun to occur – none more significantly than from the investment strategy folks over at Goldman.

In a research report published yesterday, the Goldman strategists raised their estimates of S&P 500 operating earnings for this and next year - from $40 to $52 and from $63 to $75, for 2009 and 2010, respectively. In the process, the group estimated the target fair value for the S&P 500 at 1060 – ten points above my best guesstimate for the year (as reported in the Wall Street Journal on December 30, 2008) and my more evolved view of the same number based on the simple math of the historical average P/E of 15 times a mid 2010 estimate of $70 = 1050. As John McLane (“Die Hard”) might say, “Welcome to the party, pal”.

With Goldman in tow and many fence-sitting traditional money managers and individual investors being forced to reconsider the wisdom of leaving $3.5 trillion in money market funds earning 0.1%, the more meaningful investment strategy question is “Where are we in the stock market cycle?”

Investment Strategy Implications

As expressed in this week’s research report to subscribers, stocks are clearly in extreme overbought territory at the top end of the range. A completed bottom has not occurred. Therefore, stagnation (at best) or a pullback (most likely) appears to be in the very short-term offing for stocks.

That said, each week provides more evidence that the global economy has moved further away from the economic abyss of early March. Now that monetary stimulus and creative governmental action has done its work, the bulk of the fiscal stimulus package (conveniently timed for the 2010 election cycle) will provide the needed power to move the economic needle from stabilization to growth.

Aided by the global growth story (from emerging economies) as well as the likely positive forces of the wealth effect (from higher financial asset values), corporations, having demonstrated their ability to manage solid results in times deep economic distress, should be able to generate very satisfactory earnings results in an overall improving global economic climate - including a modest contribution from the US consumer.

So, where are we in the stock market cycle?

Stocks appear to be well into a transitional phase – one in which sector (style, country, and regional) rotation will (must?) produce the new leadership necessary for a new bull market to sustain itself to 1050 and beyond. The rotation to new leadership coupled with a completed bottom are the stock market signs most worthy of investor attention.

Vinny Catalano, CFA, Global Investment Strategist with Blue Marble Research publishes the "Sectors and Styles Strategy Report" newsletter, which contains the market beating Model Growth Portfolio. To learn about subscribing as well as other benefits, click here.