As I have been harping on about in these pages for some time now, key stock indices rally when their companies expect corporate earnings to be better—they see their growth in their businesses. Right now, both corporate earnings and revenue growth are under pressure.
In the first quarter of 2013, companies on key stock indices like the S&P 500 are expected to show negative growth in their corporate earnings. Out of the 110 companies that have issued outlooks for their corporate earnings, 80% of them issued negative guidance. (Source: FactSet, April 12, 2013.)
As I have also documented in these pages multiple times, corporate insiders of public companies in key stock indices are selling their shares at a record pace and major economic hubs in the global economy are facing economic pressures. U.S. companies doing business abroad will experience a hit to their corporate earnings.
The Chinese economy grew at a pace of 7.7% per year in the first quarter of 2013 due to the dismal output from factories and slowing investment spending. (Source: Reuters, April 15, 2013.) Industrial growth in China for the first three months was 8.9%, compared to an expected 10.1%, and investment growth was 20.9%, compared to the anticipated 21.3%.
A survey of 420 U.S.-based companies by the U.S. Chamber of Commerce in Shanghai revealed that only 73% of the firms were profitable in 2012; the corporate earnings of these companies have been declining as China’s economy slows. In 2011, 78% of the U.S.-based companies operating in China were profitable, and in 2010, this number was 79%. (Source: International Business Times, March 2, 2013.)
If you bring the eurozone’s poor economic conditions into this equation (a significant number of U.S.-based firms have operations in the eurozone), the future of key stock indices becomes even more depressing. The region has been experiencing a slowdown, and even the strongest countries, like France, Germany, and the Netherlands, are facing economic pressures. If this continues, the corporate earnings of companies on key stock indices will be in trouble.
And the domestic situation here in the U.S. doesn’t look any better. Retail sales are weak, thanks to soft consumer confidence, and the employment situation is bleak. Key stock indices are rising on the hopes of better conditions ahead, but I have been seeing the opposite for months.