Looking Past Apple: 4Q14 a Bust for Majority of Stocks

4Q14 Bust for the MarketsApple Inc. (NASDAQ/AAPL) may be shining bright after delivering an astounding record quarter, in which the company sold a staggering 74.5 million “iPhones.” But while the stock market is giddy on how Apple is performing, especially in China, where it is now the top seller of smartphones, the reality is that this earnings season has largely been a bust after about 100 S&P 500 companies have reported to date.

Prior to Apple’s results, we saw mixed and soft reporting from the big banks during this earnings season. What struck me is not the muted earnings growth shown by companies, but the lack of confidence going forward, as companies appear to be hesitant on the future earnings seasons.

Companies Expecting Less in Future Earnings Seasons

We saw a constant parade of weak guidance reported by major S&P 500 companies last week for this earnings season.

Caterpillar Inc. (NYSE/CAT) was short on its earnings per share (EPS), while also telling investors to expect less in the near-future earnings seasons. The worry here is that Caterpillar is a play on the global economy, so this is not an encouraging sign.

E. I. du Pont de Nemours and Company (NYSE/DD) met Wall Street EPS estimates, but its guidance was short of the consensus.

Microsoft Corporation (NASDAQ/MSFT) and Pfizer Inc. (NYSE/PFE) also both issued cautious guidance.

The Procter & Gamble Company (NYSE/PG), a cyclical play on the global economy, reported soft results and cut its guidance.

 

United Technologies Corporation (NYSE/UTX) reduced its earnings to below the consensus in the earnings season to come.

As investors can surmise, all is not good early on in the earnings season, especially as we move forward.

Earnings Growth Estimate Revised Lower for S&P 500 Companies

FactSet just cut its earnings growth estimate again for the S&P 500 companies. For the fourth-quarter earnings season, earnings are projected to grow a muted 0.25%, versus its previous 1.7% estimate at the end of 2014. (Source: FactSet, January 23, 2015.)

The valuation going forward, based on the revised growth, is even more telling. According to FactSet, the forward 12-month price-to-earnings multiple of 16.6X is above the five-, 10-, and 15-year historical multiples. This is not good, and it doesn’t bode well for the stock market.

As such, investors may want to consider looking at reducing some of their positions and taking some profits. With the major stock indices down only about three percent from their records, I see vulnerability to the downside, which, of course, could be a buying opportunity. A downward adjustment of six percent or more would be a decent entry point to consider.