How You Can Tell the Stock Market Party’s Almost Over

Stock Market Party’s Almost OverIn my view, the stock market’s little bull is slowly deteriorating, even though investor sentiment remains quite robust. We still don’t have confirmation from the Dow Jones Transportation Average and many blue chip, brand-name companies are issuing warnings. Realistically, this stock market won’t really be in trouble until the “AGA” stocks—Apple Inc. (NASDAQ/AAPL), Google Inc. (NASDAQ/GOOG, and Inc. (NASDAQ/AMZN)—begin to break down, which hasn’t happened yet. But more and more companies are issuing warnings and, for the most part, it’s because of weakness outside the U.S. economy.

Just like in previous quarters, some parts of the U.S. economy are doing much better than others. But what we’re seeing now is worrisome, because the earnings and revenue warnings are coming from consumer-driven businesses—which make up so much of the global economy.

Nike Inc. (NYSE/NKE) is the latest blue chip company that just announced a 12% drop in its quarterly earnings due to weakness in China. Nike’s shares recently hit an all-time record high on the stock market, topping $114.00 a share in May. The stock’s been in decline ever since, and it is now trading around $92.00 per share, which can be seen in Nike’s recent stock chart below:

Nike Chart

Chart courtesy of

Another blue chip company in the consumer services sector just announced weaker financial results. Drugstore chain Walgreen Co. (NYSE/WAG) reported quarterly earnings fell 55% (which actually beat consensus) and revenues dropped five percent to $17.1 billion, down from $18.0 billion a year ago. Here’s a recent stock chart for Walgreen:

Walgreen Chart

Chart courtesy of

So this remains a stock market full of dichotomy; many blue chip companies are warning on revenue and earnings, and at the same time, there are still lots of blue chips making new record highs on the stock market. The Walt Disney Company (NYSE/DIS) just hit a new record high on the stock market, along with other blue chips in technology and other industries.

According to the U.S. Department of Commerce, U.S. incomes rose just 0.1% in August, reflecting across-the-board weakness in employment growth. Taking inflation into account, after-tax incomes actually fell 0.3% in August, representing the further deterioration of consumer buying power. (See “Don’t Get Caught—These Earnings Warnings Mean Something.”)

I’m not actually bearish on the stock market for the simple reason that stocks aren’t expensively priced. Even the many blue chip companies that are trading right at their highs are fairly priced, and this gives the stock market a lot of leeway for more upside in the face of earnings warnings. Dividend-paying blue chips have the advantage in a slow-growth environment, but those with big operations in China are now getting pinched. For many quarters now, international operations have been padding U.S. corporate earnings, and this trend is coming to an abrupt end. Weakness in the global economy is now trickling down to U.S. blue chips, and it makes the outlook for next year’s fourth and first quarters much weaker.