One of the pillars of behavioral economics is the so-called prospect theory, the idea that the pain of a loss is far greater than the expectation of a gain. That insight, developed by Daniel Kahneman , winner of the 2002 Nobel Memorial Prize in Economic Sciences, was very much in evidence on Thursday as the S & P 500 dropped 100 points in the final two hours and thirty minutes of trading. On Thursday, President Joe Biden spoke with Israel’s Prime Minister Benjamin Netanyahu, calling for an immediate ceasefire in Gaza and more protection for aid workers. News reports that Israel was preparing for possible retaliation from Iran also surfaced. Bond prices rose, yields declined, and oil rallied . Later in the day, Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, said that if inflation continues to move sideways, then he wondered whether the Fed should cut rates at all this year. Despite Thursday’s declines, the S & P 500 is only 2% from last week’s record highs. The surprise isn’t that the S & P 500 dropped Thursday. It’s that it’s been so steady The S & P 500 has been on an upward path for a remarkable five straight months, largely because earnings expectations for the first quarter and this year have been very stable. .SPX 6M mountain S & P 500, 6 months First-quarter earnings estimates for the S & P 500 have slipped to an expected gain of 5.1%, down from an anticipated increase of 7.2% on Jan. 1, according to LSEG. The decline is not surprising given that estimates usually start high at the beginning of the quarter, and fall somewhat at the very end of the quarter. Reported earnings then typically beat the lower analyst estimates, usually by 3% to 6%. John Butters, senior earnings analyst at FactSet, confirmed that analysts have made smaller cuts than average to first-quarter estimates. What would cause a more serious drop in stocks? Since earnings are what ultimately moves stocks, the question is not “What would cause a modest 2% to 5%…
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