The earnings disappointments we’re getting are mostly related to businesses with meaningful international operations. The stock market is unenthused by the slowdown in corporate earnings and is (once again) resetting its expectations for the global economy. Oil prices and the S&P 500 Index are the benchmarks for stock market investor sentiment, and they currently reveal a lack of enthusiasm for the future.
In order for the stock market to maintain any upward momentum over the short term, the S&P 500 Index must stay above 1,275. Deterioration below this level would be technically bad. Investor sentiment is changing on a dime these days, with conflicting economic news and a growing consensus that expectations for global economic growth must come down further.
It’s usual to have earnings warnings and disappointments right at the beginning of an earnings season. Big companies are typically good at keeping the marketplace informed. It’s too early this earnings season to form any general consensus about the stock market’s future, and you can’t really make new speculative bets based on the action.
Investor sentiment is going to be all over the place over the coming weeks, and the stock market’s near-term trend looks down. As I’ve been speculating, I wouldn’t be surprised if the Federal Reserve soon acts with a new form of monetary stimulus; it can’t wait much longer because of the upcoming Presidential election. The biggest technical trend for stocks over the near term is good economic news. If the stock market wanes on relative good news, then you know investor sentiment has made a real turn for the worse.
I would say that the risk of the U.S. economy going into recession next year is increasing for the simple reason that U.S. economic news isn’t showing progress. Up until the recent earnings warnings from big, brand-name companies, investor sentiment in the stock market was strong enough to keep stocks from selling off. The real test will be earnings reports from the financial and technology sectors. If the news from these companies can’t get institutional investors to buy, then the stock market is in trouble for the rest of the year.
So the investment climate remains pretty much the same as it’s been for the last two years. Investment risk remains very high, and the likelihood for capital gains is minimal. While investor sentiment changes with the news of the day, long-term fundamentals are now evident in the global economic news.
Western economies are in a period of slow to no economic growth for the near future. Central banks have done virtually all the monetary stimulus they can, which means that the global economy is on its own. The fragility in investor sentiment recently developed in the stock market because several global U.S. corporations were frank about slowing business conditions in their international operations. Economic data are always a generality, but when a company like Cummins Inc. (NYSE/CMI) says that sales are slowing, that’s real. I expect investor sentiment to continue to deteriorate over the very near term until we get some positive earnings reports.
Stock Market Investor Sentiment Drops Again…Why? was last modified: July 13th, 2012 by Mitchell Clark, B.Comm.
Mitchell Clark is a senior editor at Lombardi Financial, specializing in large- and micro-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, including Micro-Cap Reporter, Income for Life, Biotech Breakthrough Stock Report, and 100% Letter. Mitchell has been with Lombardi Financial for 17 years. He won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was a stockbroker for a large investment bank. In the... Read Full Bio »
Forecasts Aug. 29, 2015
Immediate term outlook:
The bear market rally in stocks that started in March 2009, extended because of unprecedented central bank money printing, is coming to an end. Gold bullion is up $1,000 an ounce since we first recommended it in 2002 and we are still bullish on the physical metal.
Short-to-medium term outlook:
World economies are entering their slowest growth period since 2009. The Chinese economy grew last year at its slowest pace in 24 years. Japan is in recession. The eurozone is in depression. With almost half the S&P 500 companies deriving revenue outside the U.S., slower world economic growth will negatively impact revenue and earnings growth of American companies. Domestically, America’s gross domestic product grew by only a meager 2.3% in the second quarter, which will negatively impact an already overpriced equity market.
Estimates Aug. 29, 2015
Trailing 12-month EPS for Dow Jones companies (Most Recent Quarter)