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

First Time in 11 Quarters; Corporate
Earning Growth Turns Negative

Tuesday, December 4th, 2012
By for Profit Confidential

Earning Growth Turns NegativeLoyal readers are well aware of my opinion; the stock market has been propped up over the past three years by artificially low interest rates, record government spending, and three rounds of quantitative easing by the Federal Reserve, which has poured trillions of dollars into the financial system.

When I look at the facts, I do not see a lot of reasons for the S&P 500 to move any further to the upside. The most important parts of any real stock market rally are missing: rising corporate earnings and better future expectations of corporate earnings.

It baffles me to hear stock advisors still yelling about how this is the perfect time to buy, claiming that the S&P 500 will only go higher. These advisors are unwittingly sending the herd to the slaughter.

Corporate earnings growth in the third quarter of this year was very weak. The majority of companies in the S&P 500 have already reported their financial results and, so far, corporate earnings growth has declined -0.9% from the second quarter of 2012. (Source: Factset, November 30, 2012). This is the first time in 11 quarters where corporate earnings growth has been negative.

If poor third-quarter corporate earnings growth on the part of S&P 500 companies was the end of it, I wouldn’t be so skeptical, but the fourth-quarter corporate earnings are looking dismal, too.

So far, 107 S&P 500 companies have issued guidance for their fourth-quarter corporate earnings—about 73% of them have provided negative outlook.

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Some well-recognized constituents of the S&P 500 are issuing warnings…

Caterpillar Inc. (NYSE/CAT), which lowered revenues and corporate earnings expectation for the fourth quarter, also warned investors that business is being affected by headwinds faced by the global economy. The CEO of this S&P 500 company said, “…as we’ve moved through the year, we’ve seen continued economic weakening and uncertainty. It’s definitely impacting our business with dealers intending to lower inventories and mining customers delaying some projects and reducing orders.” (Source: Caterpillar Inc., “3Q 2012 Earnings Release,” October 22,, 2012.)

Honeywell International Inc. (NYSE/HON) lowered its guidance for fourth-quarter corporate earnings growth and warned investors about the global economy taking a toll on the company’s core business as well. CEO Dave Cote said, “…looking ahead to 2013, we are planning for a continued challenging macro environment.” (Source: Honeywell International, “Honeywell Reports Third Quarter 2012 Sales of $9.3 Billion; EPS Up 9% to $1.20 Per Share,” October 19, 2012.)

Dear reader, anyone forecasting the direction of the stock market and saying it will rise is not looking at the most important factor behind a real stock market rally: corporate earnings growth. Right now, future earnings expectations are nothing to be proud of. This reality will eventually hit the market; it’s only a matter of time.

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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