Worst Earnings in Third Quarter; More Scrutiny on the Way in Fourth

Key stock indices are only as good as the companies that make up those indices. If the companies on the key stock indices perform poorly, the overall index will decline. Similarly, for key stock indices to rise, you want to see the companies perform well.

We are currently in the midst of one of the worst earnings seasons I have witnessed in a while. Large and small-cap companies in key stock indices have been showing poor results. My worry doesn’t end just here. The fourth-quarter earnings outlook is looking to be bleaker than the third quarter.

So far, 68 companies in key stock indices like the S&P 500 have provided their earnings outlook for fourth quarter—52 of these companies have provided a negative outlook. (Source: FactSet, October 31, 2012, last accessed November 7, 2012.). Hence, from the companies that have provided an earnings outlook for the fourth quarter, about 76% are lowering their earnings forecasts from previous guidance.

To make matters worse, the CEO Confidence Index, a measure of the reflections of CEOs on the economy, fell in the third quarter. Business leaders are concerned about the current state and future of the U.S. economy. Less than 12% of CEOs believe that the U.S. economy will improve in the next six months. (Source: “CEO Confidence Declines Again,” The Conference Board, October 4, 2012, last accessed November 7, 2012.)

Poor third-quarter earnings results, downgrades for fourth-quarter earnings, and down-and-out CEOs with a negative market view—all this makes me skeptical about the current state of the key stock indices. Markets are floating in shark-infested waters.

With world exports in a sharp decline, it’s easy to understand why public company profits are being squeezed. Add to the mix a U.S. consumer whose real disposable income has steadily declined along with his savings, and corporate revenue growth comes under pressure. At the end of the day, key stock indices trade on earnings and revenue growth. When there is no growth in either, stock prices regress to the mean, which means they eventually fall.

Where the Market Stands; Where It’s Headed:

Unless someone pulls a rabbit out of a hat, there is no saving this stock market. Bottom line, earnings growth just isn’t there anymore.

What He Said:

“Partying Like a Drunken Sailor: The party continues. Stocks are making new highs and people are spending like there is no tomorrow. Why? I really don’t know. Big (cap) stocks, they just continue going up. Wall Street bonuses are at record levels. Popular consumer goods are flying off the shelves. Designer clothes, fast and expensive cars, restaurants with one hour waits…people are spending in America today at an unbelievable clip. 1932, 1933…who remembers those years? The depression of the 1930s was the biggest bust of modern history. 2005, 2006, 2007…welcome to the biggest boom of the same period. When will it all end? Soon, my dear reader. Soon.” Michael Lombardi in Profit Confidential, February 7, 2007. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.