Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Stock Market Starting to Fall Apart?

Wednesday, August 28th, 2013
By for Profit Confidential

So far, 487 companies in the S&P 500 have reported their second-quarter earnings. Turns out 72% of them were able to beat mean estimates. The blended corporate earnings growth rate for S&P 500 companies in the second quarter was 2.1%. (Source: “Earnings Insight,” FactSet, August 23, 2013.)

On the surface, the corporate earnings growth rate of these companies certainly looks good. But the devil resides in the details!

While a significant number of the S&P 500 companies were able to beat the already-lowered earnings estimates in the second quarter, only 53% of these companies reported revenues above mean estimates. Not impressive.

The financial sector of the S&P 500 reported earnings growth of 28.1% in the second quarter—this was, hands down, the biggest contributor to “robust” growth in corporate earnings we saw in the second quarter.

The other nine sectors of the index didn’t do as well. Sectors like the consumer discretionary, utilities, consumer staples, health care, and industrial sectors showed corporate earnings growth of less than five percent. The telecom services, information technology, energy, and material sectors had negative earnings growth.

In other words: take the financial sector out from the S&P 500 and corporate earnings for the second quarter border negative growth.

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Going forward, it’s a rough road. For the third quarter, 103 S&P 500 companies have provided an earnings outlook. Of these companies, 85 of them have issued a negative outlook, while only 18 have provided positive guidance. The number of S&P 500 companies that are pessimistic about their corporate earnings in the current quarter makes up more than 82% of those that have issued their earnings guidance!

All of this shouldn’t come as a surprise to readers of Profit Confidential; in these pages, I have been talking about slowing corporate earnings and revenues since the beginning of this year. For the second quarter, companies in the S&P 500 only beat already-lowered expectations!

Now that we are hearing that the Federal Reserve may pull back on all that paper money printing it’s been busy with, the stock market is going down. The chart below clearly shows the index is falling apart. Don’t expect corporate earnings to save it!

SPX-S&P-500-Large-Cap-Index

Chart courtesy of www.StockCharts.com

 What He Said:

“The Dow Jones Industrial Average, the S&P 500 and the other major stock market indices finished yesterday with the best two-day showing since 2002. I’m looking at the market rally of the past two days as a classic stock market bear trap. As the economy gets closer to contraction, 2008 will likely be a most challenging economic year for America.” Michael Lombardi in Profit Confidential, November 29, 2007. The Dow Jones Industrial Average peaked at 14,279 in October 2007. A “suckers” rally developed in November 2007, which Michael quickly classified as

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Michael Lombardi - Economist, Financial AdvisorMichael 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. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. 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 or Add Michael Lombardi to your Google+ circles