Consumer Spending Falls Most in Five Years: Proof Economy Getting Worse, Not Better

Proof Economy Getting WorseA stock market can’t move higher if the companies listed on that market are not posting earnings and revenue growth. American companies are stuck on both fronts right now.

Corporate Earnings Dismal, Revenue Growth Embarrassing

As of January 23, 90 companies on the S&P 500 have reported their corporate earnings for the fourth quarter of 2014…and it doesn’t look good. The earnings growth rate among the companies that have reported is a meager quarter percent. If we assume this continues, then the earnings growth rate for the fourth quarter of 2014 for the S&P 500 companies will be the lowest since the third quarter of 2012. (Source: FactSet, January 23, 2015.) Proof our economy is getting weaker.

And revenue growth at the S&P 500 companies is very, very soft. Of the S&P 500 companies that have released their 4Q14 results, the average revenue growth has been just a little more than half a percent (0.63% to be exact). Companies in the financial sector and the energy sector are leading the pack when it comes to a decline in revenues.

The future looks terrible, too! Of the 14 big S&P 500 companies that have issued guidance for the first quarter of 2015, 12 of them have issued negative guidance and only two have issued positive guidance. In other words, for every one positive outlook, there are six negative ones!

With the U.S. Department of Commerce reporting this morning that consumer spending in December 2014 fell the most since September of 2009, this looks to be a very challenging year for American companies. (Source: Bloomberg, February 2, 2015.)

Share Buybacks and “Cost Cutting” the Only Way Earnings Are Being Supported

In their efforts to prop up per-share earnings, public companies are either taking the axe to their overhead (slashing jobs) or continuing with their aggressive stock buyback programs.

Consider International Business Machines Corporation (NYSE/IBM) as one example. IBM reported earnings of $5.51 per diluted share for the fourth quarter of 2014. But the company purchased almost eight percent of its diluted shares since 4Q13. If it hadn’t done that, IBM’s earnings per share would be $5.07—or roughly eight percent lower than stated. (Source: International Business Machines Corporation, January 20, 2015.)

Total revenue for the fourth quarter collapsed almost 12% at IBM. (Revenue growth is a great indicator of how a company is faring, because it is very difficult for companies to financially engineer sales to boost them higher.)

And there’s a report that states IBM is planning massive job cuts. In fact, the company is expected to cut more than 110,000 jobs. (Source: Financial Post, January 26, 2015.) The company has denied the number is that big, but has confirmed planned lay-offs.

Investor Beware in 2015

With all this said, investors have to move with extra caution in 2015. They have to realize key stock indices have been rising on weak fundamentals for way too long. Corporate earnings are boosted by share buybacks and the revenue growth just isn’t there—companies aren’t selling more. At the very core, the two most important factors of a stock market rally (earnings and revenue growth) are missing.

The official numbers: The Dow Jones Industrial Average lost 659 points in January of 2015—a decline of 3.7%. The S&P 500 lost 3.1 in January. The fall from grace for stocks has begun.