Just How Stupid Do Public Companies Think Investors Are?

When All Else Fails to Explain Declining Earnings, Blame the WeatherAccording to FactSet, between January 1 and mid-March of this year, 195 of the S&P 500 companies have used the word “weather” in some manner in their conference calls. This is 81% higher than the same period a year ago, when 108 of the S&P 500 companies used the term “weather” in their conference calls. (Source: FactSet, March 14, 2014.)

Public companies in key stock indices are preparing investors for poor first-quarter earnings by saying poor (extra cold) weather conditions this year are putting a damper on sales.

Take FedEx Corporation (NYSE/FDX) as an example of the many companies on key stock indices blaming the weather for dismal corporate earnings. While presenting its most recent quarterly corporate earnings for the three months ended February 28, the CEO of the company said, “While severe winter weather often affects our (fiscal) third-quarter results, the impact from multiple severe storms and frigid temperatures was significantly more pronounced this year and we are reducing our full-year earnings per share guidance as a result of the weather impact.” (Source: “FedEx Corp. Reports Third Quarter Results,” FedEx Corporation, March 19, 2014.)

How can you lay blame on one quarter’s “bad weather” for the entire year’s earnings performance? The way I look at it, the “weather” is just a “blame factor” for companies in key stock indices that are facing earnings growth issues.

Stock analysts have really been busy lowering their corporate earnings expectations for companies in key stock indices. In the first quarter of this year, on average, analysts expect the corporate earnings of the S&P 500 companies to increase by only 0.3%. At the end of last year, this number was 4.4%! (Source: FactSet, March 14, 2014.)

And it doesn’t end here.

Corporate insiders have turned extremely bearish on key stock indices. They are selling a significant amount of stocks in the companies they work for. Current bearishness among corporate insiders exceeds 2007’s levels.

Last year’s trick of buying back stocks to make per-share earnings look better for companies in key stock indices helped mask the problem of falling corporate earnings growth. This year, aside from the “weather” thing, public companies in key stock indices have failed to come up with another financial engineering move that will boost per-share profits.

With all this said, I am very careful. Yes, I know I’ve been saying for some time now that the party for key stock indices that started in the spring of 2009 is coming to an end. And I’ll be the first to admit the length of the “rebound rally” from 2009’s lows has been longer than I ever expected.

But at this point, all the historically proven stock market indicators I follow are flashing red. Yesterday, we even had new Fed Chief Janet Yellen say interest rates would rise in 2015…and the stock market rallied!

A stock market that rises for no good reason is a risky stock market.