First-quarter earnings are beginning to trickle in. And it isn’t pretty. The S&P 500 is in an earnings recession with earnings forecasted to be down for a fourth consecutive month. Revenues are projected to fall for a fifth consecutive month. And the long-suffering bull market that has been stumbling along in an inebriated state for more than a year now—it will have to make way for a bear market that is just stretching its limbs.
Earnings Recession Continues for S&P 500
If earnings and revenue mean anything, then investors should be more than a little concerned about the performance of the S&P 500. The S&P 500 is in an earnings recession (at least two consecutive months of negative earnings) and the future looks bleak.
Yes, stocks have rallied back from their worst start to a year ever, but they haven’t made any gains in 2016. For that matter, the S&P 500 hasn’t really done anything for more than a year or so. Yet the index continues to trade near record-highs. With daffodils blooming, fears of a U.S. recession and global economic malaise are but a distant memory.
But again, if earnings and revenue are actually an indicator of the broader economy, investors should be worried. For the first quarter of 2016, the estimated earnings decline is -9.1%! This is a far cry from the expected 0.7% growth rate forecast at the start of the quarter. (Source: “Earnings Insight,” FactSet, April 8, 2016.)
If the index reports a decline in earnings in the first quarter, it will mark the first time the S&P 500 has seen four consecutive quarters of year-over-year declines in earnings since the fourth quarter of 2008 through to the third quarter of 2009.
Seven sectors are expected to report a year-over-year decline in earnings led, not surprisingly, by the energy (-103.8%) and materials (-21.9%) sectors. Three sectors are predicted to report year-over-year earnings growth, led by the telecom services (13.2%) and consumer discretionary (10.0%) sectors.
In the second quarter, the earnings decline estimate is -2.7%. Overly optimistic analysts are predicting earnings to recover in the second half of the year with third-quarter growth of 3.8% and fourth-quarter growth of an eye-watering 11.0%.
Keep in mind that these are the same analysts who expected to see record-level earnings per share (EPS) to resume in the third quarter of 2015. It didn’t. Earnings were down -1.3% and marked the first back-to-back quarters of earnings declines since 2009. (Source: “Earnings Insight,” FactSet, November 27, 2015.)
Wall Street Cheers Weak Economy
The U.S. might have rebounded from the ugly depths of February, but it clearly isn’t because the global economy has rebounded. Nope. Stocks are rebounding because the Federal Reserve is more than a little dovish about the state of the U.S. and world economies.
Not only did the Federal Reserve not raise interest rates in March, but it also lowered its forecast for U.S. economic growth to 2.2%, down from its 2.4% projection announced way back in December. Going even further back, in December 2013, the Federal Reserve said the U.S. economy would advance 2.3% in 2016. (Source: “Economic Projections,” Board of Governors of the Federal Reserve System, March 16, 2016.)
Wall Street will only be able to cheer a low interest rate for so long. Eventually, analysts and investors will need to wake up to what they’ve been preaching since the first stock certificate was sold—reward companies that grow and punish those that don’t. That’s not happening right now. The S&P 500 is in an earnings recession but investors don’t seem to mind. Interest rates are low, so buy, buy, buy.
This isn’t sustainable. But why worry? Even the former chief economist of the International Monetary Fund (IMF) said he was “more optimistic than the median investors” and that a pessimistic view won’t help markets. (Source: “Doom and gloom not the right way,” CNBC, April 8, 2016.)
Well, it might not help the markets, but it will help individual investors who blindly throw their money at overvalued stocks. Pessimism might not have been the mood of the day back in late 2008 when stocks fell over a cliff, but a healthy dose of skepticism or even objectivity could have saved investors a lot of money.
Oh yea, then there’s Olivier Blanchard, a senior fellow at the Peterson Institute for International Economics, who said that “gloom and doom doesn’t seem to be the right way of thinking about things.”
Thanks for that. But again, a little investor objectivity could save you a lot of headache. Doom and gloom may not be welcome at a birthday party but what’s the alternative? If analysts were projecting four consecutive quarters of declining earnings but got growth instead, they’d be patting themselves on the back and telling you to jump into the markets.
But reverse the scenario and they’re still saying the same thing. It doesn’t add up. We’re four months into an earnings recession and there are no strong fundamentals supporting the recent rally. Nor is there any solid economic news coming from the rest of the world. The future looks bleak.
If anything, S&P 500 companies are flashing warning signs—but few investors seem to be taking heed.