While public companies can manipulate their per-share earnings with stock buyback programs and other tricks (like reducing their capital expenditure budgets), there is little companies can do to mask revenue growth.
For the fourth quarter of 2014, S&P 500 companies are expected to report a pathetic revenue growth of 1.1%—that’s 68% below the average revenue growth over the past three years of 3.5%. (Source: FactSet, January 9, 2015.) Weak revenue growth means companies are having a difficult time selling more goods or services to their customer or they are having troubles getting more customers. At the very core, poor revenue growth is a reflection of poor economic growth.
And we have seen more and more companies provide a negative outlook for their corporate earnings. So far, of the 108 companies on the S&P 500 that have provided an outlook, 81% of them have issued negative guidance—well above the five-year average of 68%. (Source: Ibid.)
Earnings growth expectations are collapsing, too. At the end of September 2014, analysts had expected the S&P 500 companies to show earnings growth of 8.4% in the fourth quarter of 2014. Now they expect this rate to be only 1.1%.
More Share Buybacks Coming Soon?
In 2015, I expect to see public companies continuing to buy back their stock to prop up per-share earnings. In the third quarter of 2014, 75% of all the S&P 500 companies bought back their shares.
Companies on the key stock indices have built up massive cash positions. They are not using the cash to invest in new projects/products or hire more employees—they are not building their core businesses. At the end of the third quarter of 2014, S&P 500 companies had a cash balance of $1.37 trillion. (Source: FactSet, December 2014.)
While analysts expect S&P 500 companies’ capital expenditure to drop by one percent over the next 12 months—a number I believe is far too optimistic—we are now talking hundreds of billions of dollars headed toward stock buyback programs as companies support their per-share earnings.
Higher Risk of Equities May Not Be Worth It in 2015
Assessing all this (non-existent company revenue growth, earnings growth only supported by stock buyback programs, lack of capital expenditure, and a lack of old-fashioned business growth via investing), I continue to be very negative on equities for 2015.
Stock market valuations are out of proportion. Stock buybacks are just a short-term fix. Long-term, the bigger problem remains—core businesses are not growing. We’ve already witnessed a rough start for stocks in 2015; more of the same will follow as daily trading ranges could get bigger and market volatility increases significantly this year.