Economic Outlook 2015: Weak Earnings Show Little Promise

Economic OutlookThe economic outlook for 2015 was looking pretty average before. But now with the decision of Greece to reject the austerity program imposed on it by its lenders, along with the stock market bubble in China, things out there are looking downright frightful.

What the Charts Are Saying

On the charts, the Dow is below its 50-day and 200-day moving average (MAs), while the S&P 500 and NASDAQ Composite are below their respective 50-day MAs. Over in China, the Shanghai Composite Index is down a whopping 25% in just over a week, with strong potential for the situation to worsen. The latter is a discussion to have another day; but be aware of this and hedge through put options.

While we deal with the uncertainties across the oceans in Greece and China, domestic investors are now getting set for the second-quarter earnings season. That begins officially with Alcoa Inc. (NYSE/AA), the first S&P 500 company to report today.

Don’t expect much for earnings or revenues. Due to the economic uncertainty not only here but also in the global economy, there will undoubtedly be effects on U.S. multinationals.

Flat Economic Outlook for 2015 to Impact Corporate America?

Don’t blame me if I’m not planning to jump up and down when it comes to the second quarter. The first quarter was soft…and I’m not expecting things to get better anytime soon.

Companies continue to face stalled earnings and revenues partly due to the strong dollar and its impact on the demand for U.S. goods and services.

We’re still seeing flat or negative revenue growth, which has been around for years. And yet the stock market has pushed it aside.

This second-quarter earnings season looks bad. The S&P 500 companies are projected to report a 4.5% year-over-year decline in earnings, something that has not been seen since the third quarter of 2012. (Source: FactSet, last accessed July 6, 2015.)

The energy sector is still seeing the biggest earnings declines, while healthcare remains at the top amongst the 10 sectors in the index.

Stock Market & Economy Going Forward

Looking ahead, there is minimal optimism at this time. About 107 S&P 500 companies have offered guidance, with a whopping 80 companies issuing negative earnings guidance.

The revenue side is clearly under pressure with revenues estimated by FactSet to contract 4.5% during the second quarter. This estimate doesn’t bode well for the economy, as it means spending will be down. The revenue contraction is expected to continue in the third and fourth quarters, which suggests softness in gross domestic product (GDP) growth for the remainder of this year.

Of course, the outlook for companies could worsen should Greece exit the eurozone, which could lead to the other weaker members like Portugal and Ireland rethinking their respective situations.

At the end of the day, you should continue to expect a bumpy ride for the remainder of the year. Chasing stock market rallies is not smart to do. Rather, I would be looking to sell into strength. Using put options to hedge and covered call options to generate premium income are your best bets.