If You Think the Stock Market Is Rising Because Companies Are “Doing Better,” This Story Will Change Your Mind

We’re halfway through the second quarter’s earnings reporting season and, as I expected, it’s not turning out to be as good as what optimistic advisors were expecting. Corporate earnings for the S&P 500 companies are anemic, and their prospects of growth in the current quarter have already started to diminish.

Sure, it’s common these days to hear S&P 500 companies are beating corporate earnings expectations. In fact, as of July 26, 263 of the S&P 500 companies had issued their quarterly corporate earnings, and 73% of them beat expectations. (Source: FactSet, July 26, 2013.)

Sounds great—until we take a closer look.

Companies beating expectations aren’t what they appear to be. What they are “beating” are analyst expectations that have already been lowered. As a matter of fact, the corporate earnings “surprise” factor (the percentage of companies reporting well above expectations) is only 3.2% so far—far below the average for the last four years.

As for the revenues of the S&P 500 companies, we have seen a growing trend of companies reporting revenues well below expectations. For the second quarter, so far, only half of the S&P 500 companies that have rang in their corporate earnings registered revenues that were above expectations.

And we have the S&P 500 companies issuing warnings about their corporate earnings for the current quarter.

So far, 43 of the big S&P 500 companies have issued negative warnings about their third-quarter corporate earnings, while only 11% provided positive guidance.

Add in the stock buyback stories I have been writing about in these pages, and corporate earnings for the second quarter are far from impressive. Looking at future earnings guidance keeps me pessimistic about the corporate earnings growth rate going forward.

How long can the stock market continue rising if corporations are struggling for income and revenue growth? The markets can stay irrational for a long period of time, and they will continue to rise irrationally until: 1) the Fed reduces the amount of new money it creates each month; or 2) consumers pull back on spending as the economy erodes. We are likely to see the latter scenario before the first, as consumer spending is getting softer with each passing day.

The U.S. economy is in a “no-growth” stage. It’s growing at a rate of only 1.7% per year, according to a report yesterday from the U.S. Department of Commerce (a figure I expect to be revised downward in the weeks ahead).

With the Commerce Department’s gross domestic product (GDP) numbers yesterday, we discover consumer spending has dropped 22% from the first quarter of 2013 to the second quarter of 2013. How can corporate earnings rise in such an environment? They can’t, and that’s why the stock market’s advance (minus the Fed’s $85.0-billion-a-month printing program) is a farce.