Good News Has Arrived for Investors

I'm happy to report that my very favorite macroeconomic indicator has turned positive. I'm not talking about Friday's surprisingly not-bad jobs report. It's something I like even more.

It's my favorite because it has nothing to do with macroeconomics, and it is based on analysis that is always wrong. And yet, it works.

I'm talking about consensus forward earnings for the stock market. That means taking all the Wall Street analysts' guesses for earnings one year in the future for whatever companies they happen to cover, averaging them, and then capitalization-weighting them so you get the aggregate consensus for the whole S&P 500.

No analyst's estimate for a particular company is a forecast of the overall economy. It may take the economy into account in some way, but it's mostly just a forecast for what a single company will do.

And as we all know, Wall Street analysts are almost always way off target. They're generally way too bullish. And a lot of people believe they're corrupt, as well, giving flattering appraisals of companies that their investment firms would like to do business with.

But it turns out that when you average them all together, their errors and their biases cancel out. And in the aggregate, they can be used as a bottom-up view forecast of the whole economy.

And it works. Turning points in aggregate consensus forward earnings for the S&P 500 -- that is, when they've stopped growing and started falling -- have perfectly forecasted the last three recessions, including the current one.

And when they turned up, they perfectly forecasted the recoveries from the last two recessions. The great news is that they're on the very verge of turning up right now. It's just a matter of days.

They've already turned up if you take out the damaged financial sector. But even including that problem child, they're improving fast. Again, it's just a matter of days.

Let me be clear about what this means. In October 2007 -- within days of the all-time top for stocks -- aggregate forward earnings started to turn down. It was a perfect sell signal. But at first, all it really meant was that the 500 companies in the S&P 500 were expected have their earnings grow more slowly than had been expected before.

In July 2008, it got worse. Within weeks of the onset of the worst of the global banking crisis, aggregate forward earnings suddenly deteriorated so badly that they were forecasting outright lower earnings, not just more slowly growing earnings. Again, it was a perfect sell signal -- a week or two later, the wheels came off the global economy, and the stock market.

Three months ago, within days of the bottom in stocks, aggregate forward earnings started to turn around. It was less than a ringing endorsement at first. It just meant that the decline in earnings was now expected to get less bad -- not that earnings would actually grow. But it was a perfect buy signal.

And now aggregate forward earnings are on the verge of forecasting that earnings growth is back. It's a buy signal. And if the pattern holds, it will be a good one.