By BERNARD CONDON, Associated Press
NEW  YORK --?One type of investor buys stocks when everyone is convinced that  corporate earnings will fall. He buys because he thinks they're wrong and  earnings will rise instead. Call him the 
contrarian.?
Another type of  investor buys when everyone thinks that earnings will rise. He buys because he  thinks they'll rise even more than expected. Call him the eternal optimist.
Now, the 3?-year-old bull market may have produced a third type of  investor, an undiscovered breed with a curious strategy for success: He expects  earnings to fall but buys anyway because he hopes it won't matter.
Call  him the blind-faith investor. Or maybe just blind.
 "How do you explain  where the stock market is?" Barclays Capital stock strategist Barry Knapp said  last week as the Standard & Poor's 500 inched higher yet again. "Stock  prices are not warranted by the fundamentals."
The financial reporting  season begins Tuesday, when Alcoa announces third-quarter results. Brace  yourself: For three months, stock prices have risen while, in seeming  contradiction, Wall Street analysts have slashed estimates for earnings.
Earnings for July through September are expected to drop 1.3 percent  compared with a year earlier for S&P 500 companies, according to S&P  Capital IQ, a research firm.
That would break an 11-quarter streak of  rising earnings that began just after the Great Recession ended three and a half  years ago. Earlier this year, analysts had expected earnings for the quarter to  rise 7 percent.
To be fair to the bulls, it's generally future quarters  that investors should be most concerned about, not the one that just passed.  That's a time-honored rule of investing.
But analysts have been cutting  estimates for those quarters, too. They've lowered forecasts for earnings growth  for each of the next two quarters by a third since the summer, and as much as  half since the beginning of the year.
The bad news started in July, when  UPS, the world's largest package delivery company, said the global economy was  slowing and lowered its 2012 profit forecast as a result.
Then FedEx  said that shipping volume had fallen to recession levels, and that investors  should expect lower earnings. Norfolk Southern, the giant railroad company, cut its forecast, too.
The flurry of so-called negative pre-announcements  ranged across industries ? from steel maker Nucor Corp. and Applied Materials  Inc., which sells semiconductor-chip-making machines, to Starbucks and Tiffany  & Co.
On Tuesday, Fifth & Pacific, the company behind Juicy  Couture products, said sales were weakening and it was likely to report lower  earnings than expected, too. Investors pushed its stock down 11 percent in just  a day.
Tally it up and 78 percent of companies issuing pre-announcements  have suggested they will disappoint, according to FactSet, a financial data  provider. That is the worst reading since FactSet began keeping records six  years ago.
The problem is companies are running out of ways to increase  earnings. You can see that in the results for the previous quarter, from April  through June. Earnings for companies in the S&P 500 barely rose from a year  earlier, just 0.8 percent.
U.S. economic growth has slowed to an annual  rate of 1.3 percent, practically stall speed. Meanwhile, the old formula that  companies have used to compensate ? pulling more profit out of each sale by  trying to run leaner ? suddenly isn't working.
You can only cut expenses  and squeeze workers so much, and many companies seem to have reached the limit.  Profit margins are falling for the first time in the recovery, after hitting a  record of nearly 9 percent, according to Goldman Sachs.
The other way  U.S. companies have posted higher profits is by selling more abroad. But many of  the 17 countries that use the euro have fallen into recession. And developing  countries are facing headwinds now, too. China, India and Brazil are slowing. On  Wednesday, the Asian Development Bank slashed its growth forecast for emerging  economies this year and next.
So what's kept stocks rising? One theory  is loose monetary policy.
The Federal Reserve announced last month a  third round of bond-buying to try to stimulate the economy. That followed a bold  plan by the European Central Bank to buy government bonds of struggling  countries in its region.
"Central banks have single-handedly kept asset  prices elevated," said Peter Boockvar, equity strategist at trading firm Miller  Tabak Advisors. "It's certainly not the economy. It's certainly not the  trajectory of earnings."
To be sure, analysts have been too pessimistic  before, and investors who ignored them made money. Analysts expected earnings to  fall in the first quarter of 2012, but they didn't. Those who bought the S&P  500 at the start of the year are up 16 percent.
And even if analysts are  right and earnings fall, you can still make money buying stocks, though history  suggests it's risky.
In the 46 quarters since the start of 2001,  earnings for the S&P 500 have fallen 15 times. Seven of those times, stock  prices rose the following three months, sometimes spectacularly.
In the  first quarter of 2009, S&P 500 earnings plunged 35 percent. Yet investors  who were brave enough to buy stocks enjoyed an S&P 500 gain of 15 percent  over the next three months. If they held on after that, they doubled their  money.
Similarly, investors won big who bought after the third quarter  of 2001, when earnings fell 23 percent. Stocks rose 10 percent the following  three months. But unlike in 2009, the next few quarters produced losses as  earnings kept plunging. Stocks dropped for the next three quarters, in one of  them by 18 percent.
Investors shrugging off disappointing earnings now  are hoping the current period resembles 2009. But it's not a sure bet, and they  may end up getting something closer to 2001 instead.?
More business news:
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Where is the stock market headed in the next 6 months?
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Source: http://marketday.nbcnews.com/_news/2012/10/07/14248051-earnings-may-not-matter-to-a-new-breed-of-investor
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