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Tickers in this Article: SPY, DIA, IWM, TLT
The S&P 500 corrected 10.5% in the spring and is now back up to within 3% of its highs since the Great Recession. Clearly, portfolio managers see lots of value in companies posting record profits. In the aggregate, these earnings could total over $102 EPS for the index this year, giving it a running P/E multiple of about 13.5X. And since next year's estimates are still in the neighborhood of $110, the index could travel up to 1485 and keep that attractive forward multiple.

But that's the critical question: Will estimates stay that high or are they destined to come down?

The current earnings season says "probably not." Here is Sheraz's summary at the end of last week:

The second quarter earnings season has turned out to be quite decent -- not strong or good, but better relative to pre-season expectations.With results from 292 S&P 500 companies available at this stage (as of Friday, July 27th), total earnings are up 5.4% from the same period last year, though the growth rate turns negative once Finance gets excluded. In addition to Finance's heavy contribution to the aggregate growth picture, performance on the revenue front has been notably weak as well.

While 67.1% of the companies have beat earnings expectations, the beat ratio on the revenue front is far weaker -- only 36.6% of the companies have beaten revenue expectations. Even some of these companies with positive revenue surprises for the second quarter have guided towards lower revenue numbers in the coming quarters. This does not bode well for growth in the coming quarters.

And it is the trend of weaker revenue growth that seems to confirm the global slowdown data we are getting here and abroad."But what about all those EPS beats?" say the bulls.

Beyond lean and mean corporate America's ability to squeeze more bottom line from less top line, the lowered bars can sometimes sneak past you in real-time.The chart below from Citi shows what EPS results look like if the estimates were frozen before reporting began.

So, should the market be chasing those fictional future earnings of $105 and higher? In other words, is the market fairly valued around S&P 1400, or should it come down to reality?

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