Over half of companies in the S&P 500 have now reported earnings and we’re observing a familiar theme. For the fourth consecutive quarter, earnings have declined on a year-over-basis.

On the revenue front, growth has turned negative for the third consecutive quarter.

The Enigma

If earnings and revenues are supposed to drive stock prices, how can the S&P 500 be only 2% away from hitting a new all-time high?

The prevailing narrative is as follows:

1) The decline in earnings and revenues over the past year is just an energy story. The 60+% crash in Crude prices has weighed heavily on the sector, and earnings “ex-Energy” are holding up just fine.

(While the decline in Energy earnings has been a large contributing factor, it is not the only factor. Last quarter nearly 50% of companies in the S&P 500 reported year-over-year declines in earnings. Energy companies accounted for less than 7% of the Index.)

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2) The U.S. Dollar’s historic advance has been acting as a headwind to multinational company earnings. This is a transitory factor and earnings ex-Dollar are doing just fine.

(While it is difficult to say exactly how much the Dollar has been impacting earnings, there is no question that it has been a headwind. On whether it is a transitory factor, that remains to be seen but the Dollar’s advance has certainly abated in a recent months.)

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3) Earnings and revenue growth don’t have the same significance in the new paradigm of global central bank easing. With the exception of Brazil, every major Central Bank is still pursuing an easy monetary policy. This is said to be good for sentiment and multiple expansion, which are the most important drivers of stock prices in the short run.

(I touched on this concept a few months ago, see “The Voting Machine”)

Narrative vs. Reality

All of these narratives work nicely in explaining the resiliency of the stock market in the face of falling earnings and revenues. The question of course, is whether they will continue to support equity prices going forward.

The answer to that depends on your outlook for Crude, the Dollar, central bank policy, and global growth.

If you’re bearish today, you are likely of the belief that the headwinds from weaker Crude prices and a stronger Dollar will continue to put pressure on earnings in 2016. Those in this camp see a global recession taking place in 2016 with any tightening by the U.S. Federal Reserve in the coming months only exacerbating these conditions. Additionally, with U.S. Nominal GDP growth already down to 2.9% year-over-year (the slowest pace in history outside of prior recessions), the bearish camp will argue that the U.S. does not appear to be “decoupling” from the world.

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If you’re bullish today, you are seeing the glass as half full. You would argue that the S&P 500’s resiliency is a sign that markets are already looking ahead to a better 2016. With Crude and the Dollar Index at the same levels as January, they would argue that the year-over-year comps will soon start to get better. Additionally, should global growth improve, this will provide another tailwind for earnings. On the central banking front, bulls will argue that a few Fed hikes are already “priced in” and would be a positive sign indicating strength in the U.S. economy. As proof of such strength, bulls will point to continued improvement in the job market, with Initial Jobless Claims at their lowest level since 1973.

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Bulls vs. Bears

As far as which side the market seems to be favoring, for now the Bulls seem to be in control. The S&P 500 is sitting only 2% below its highs and expectations are for earnings to turn positive in the fourth quarter (see chart below). Should these expectations prove too optimistic, though, that would be a potential headwind in 2016. That is of course unless this weakness leads to continued Fed easing which renders earnings/revenues irrelevant (bad news = good news). Confusing, I know. No one ever said this was easy.