As this issue goes to press, the Dow Jones Industrial Average is down for the year. Yes, 70 days into the year, we’ve seen the stock market move up to new highs and we’ve seen stocks move back down. The bottom line is that stocks are lower today than when the year opened. This is consistent with my 2015 outlook that stocks are overpriced and this would be a down year for the stock market. (In case you missed my 2015 outlook, you can see it here.)
It can’t be stressed enough: irrationality in the stock market has been too extreme for too long. Investors are ignoring the most basic fundamentals that drive stock prices higher—corporate earnings and revenue growth.
Corporate Earnings and Revenue to Decline in First Half of 2015
So far, about 100 of the S&P 500 companies have provided an outlook for their first-quarter 2015 earnings. Of these companies, 85% have issued negative guidance. Yes, of all the S&P 500 companies that have issued corporate earnings guidance for the first quarter, 85% are expecting their earnings growth to be dismal.
And the expectations of stock market analysts aren’t any better. The corporate earnings of S&P 500 companies, year over year, are expected to see a decline of 4.9% in the first quarter of 2015, and then another 1.5% decline in the second quarter. Initially, analysts were forecasting earnings growth of 3.8% and 5.0%, respectively.
Revenue is expected to be dismal, too. In the first quarter, S&P 500 companies are expected to report a decline of 2.7% in revenues. In the second quarter of 2015, their revenues are expected to decline by another 2.8%.
Looking at all this, is it any wonder stock prices have stopped going up? What’s really happening, dear reader, is that the stock market is putting in a huge top that will likely form what is referred to as “resistance” for the market for years to come.
Does Economic Data Matter Anymore?
But the irrationality doesn’t stop with the stock market and the lack of attention investors are paying to corporate earnings. Investors are overlooking the macroeconomics data, too.
The global economy, as I have written so many times, is in trouble. All the major economic hubs I follow are facing severe headwinds. Japan is in recession, China will grow this year at the slowest rate in years, the eurozone is in a depression, Russia is entering a depression, and Canada is in trouble now, too, as oil prices have collapsed. Key indicators like the Baltic Dry Index (BDI) have been flashing warning signals for months.
The U.S. and the U.K. are the only major economies faring “okay.” With this said, know that the U.S. economy isn’t an isolated island nation. If the global economy faces trouble, it will eventually hit the U.S. Public companies that trade on major American stock markets derive a significant amount of their sales from the global economy; these companies are already facing revenue and corporate earnings growth challenges.
How Far Away Should You Stay from the Stock Market?
I have been following the stock market for 30 years. Personally, for me, the risks of investing in stocks far outweigh the rewards. In fact, they may just be the worst investment because they are so overvalued by almost every stock market valuation tool I use. Caution is hands down the best investment strategy for now. The risks on downside for the stock market continue to increase each passing day.