Why the Market Didn’t Break to New Highs
Monday, September 27th, 2004
By Michael Lombardi, MBA for Profit Confidential
After four consecutive quarters of S&P 500 earnings growth of over 20%, the consensus earnings growth for the S&P 500 for the third quarter of this year has fallen to about 14%.
As I have been writing about extensively, consumer spending has not been as robust as it has been in the past. I have a feeling consumers are putting on the brakes when it comes to spending. We’re also getting mixed signals from the Fed and the bond market. The bond market acts as if it expects interest rates to decline, while the Fed insists it will continue on its “measured” rate increases.
The recent spike in jobless claims, the decline in the U.S. leading indicator for August, and Friday’s report of an unexpected drop in August U.S. durable goods orders all coincide with the “now” expected drop in earnings growth for the S&P 500 companies.
In general, and all things equal, the stock market likes future earnings growth. Remember, the market acts like a leading indicator. So when the stock market is rallying, we can expect higher earnings growth from companies in the months ahead. On the other hand, the stock market doesn’t like to see earnings growth momentum breaking down. And maybe that’s just what the market has been telling us all along.
Despite the fact that interest rates in the U.S. fell to an unprecedented 46-year low, the Dow Jones Industrial Average was not able to rally to a new record high. Why?
Well, we now know the S&P 500 companies will report earnings growth 30% below what they have been reporting over the past year or so. The stock market, the greatest investor of them all, didn’t break to new highs, like it should have with a Federal Funds Rate of only 1%, because it correctly foresaw weaker earnings growth ahead.
Personally, from what I read, analyze, and hear from associates in business, I would not be surprised if the actual and final earnings growth for the S&P 500 companies for the third quarter was well below 14%. Funny how only a few months ago analysts had been predicting earnings growth of over 25% for the S&P 500 companies for the third quarter. They sure did change their tune quickly.
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Tags: interest rates, S&P 500, stock market
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
