Poor economic data, signs of a slowing global economy, and tumbling oil prices have sent U.S. stock markets off on one of its worst starts in years. But according to the latest stock market outlook from one analyst, we could be on the verge of a major bear market.
Keith McCullough, CEO at investment research firm Hedgeye, is worried about declining corporate profits. According to his analysis, back-to-back quarters of declining earnings have “always” resulted in a decline of 20% or more in the S&P 500 next year. (Source: “Ugly earnings may mean a scary S&P 500 plunge — 20%, for starters,” MarketWatch, February 4, 2016.)
Each cycle is different. But according to the analysis done by Hedgeye, declines in equity prices can begin in as quickly as one quarter following the drop in corporate profits.
From the chart, it’s easy to see that McCullough may be onto something.
Most companies disappointed on their revenue numbers for the December quarter and lowered their guidance for the rest of 2016. (Source: “Earnings take a dark turn as profit warnings, sales misses mount,” MarketWatch, January 28, 2016.) One only has to be reminded about Apple Inc.’s (NASDAQ:AAPL) revenue miss in its latest earnings report to see that global growth is slowing, which may not bode well for the future of the stock market.
According to John Butters, senior analyst at FactSet, the S&P 500 is about to enter its third consecutive quarter of earnings declines, so the fix may already be in. Butters says that earnings of companies in the S&P 500 declined 0.7%, 1.5% in the third quarter, and is on track to post a 5.6% loss in the fourth quarter of 2015.
The S&P 500 is down about seven percent for the year and if McCullough is right, the stock market’s current tumble may be far from over.