As of July 24, 187 companies in the S&P 500 have reported their corporate earnings. For these 187 companies, their average decline in earnings has been 2.2%. If this is the final number, then it will be the biggest decline in quarterly earnings for the S&P 500 since 2009. (Source: FactSet, July 24, 2015.)
But it may get worse. Only one-third of the companies in the S&P 500 have reported earnings so far, so a major portion of the companies have yet to report. Going into the corporate earnings season, the expected decline in earnings was 4.5%. That might still happen.
And revenues aren’t looking good either.
Of the S&P 500 companies that have reported so far, just a little more than half of them have beaten their second quarter revenue estimates. As it stands, the revenue of S&P 500 companies that have reported second quarter results has declined four percent. If this percentage decline in earnings stays as is, it will be the second consecutive quarterly decline in revenues for the S&P 500 and the biggest decline since 2009.
Making Sense of the Corporate Earnings
Before getting into details, just look at the chart of S&P 500 below; pay close attention to the circled areas.
Chart Courtesy of www.StockCharts.com
Over the past few years, companies were able to use the financial engineering of stock buybacks to prop up their per-share earnings and thus lure investors into the market. But not anymore.
From the chart above, we see that, so far this year, the S&P 500 stock index has been flat and refuses to go higher. What is happening now is that stocks are hitting a peak, and then coming down. As the chart shows, it’s happened three times since the start of 2015.
According to the Investment Company Institute’s data, in the first five months of 2015, mutual funds that invest in U.S. stocks have seen an outflow of $36.8 billion. In the same period of 2013 and 2014, these funds saw an inflow of $15.1 billion and $10.7 billion, respectively. (Source; Investment Company Institute, July 22, 2015.)
We don’t know the monthly figures for the month of June, but looking at the weekly figures, it appears these mutual funds had withdrawals of about $14.2 billion. For the three weeks of July, the outflow has amounted to $19.3 billion.
In other words; investors are slowly realizing that stocks are overpriced and they are selling.
Why Investors Should Practice Caution
Once you take out the emotions of fear and greed, corporate earnings and revenue are the most basic reason as to why stock markets fall or rise. Right now, both earnings and revenues are declining and the future doesn’t look very optimistic.
So far this year, the stock market has provided the worst return of any period since 2010. And it will only get worse.