Warning: QE3 Rally Is Now Over

By Wednesday, October 24, 2012

dollar dominoReality has finally set into the stock market—no amount of quantitative easing, money supply increases, or artificially low borrowing rates can stop this business cycle. The most important economies in the world are not growing very much at all and, therefore, neither are corporate earnings and revenues.

Corporations can only cut costs for so long before corporate earnings are affected by declining revenues. The third-quarter earnings report of E.I. du Pont de Nemours and Company (NYSE/DD) says it all. The company reported that its third-quarter revenues dropped to $7.3 billion, down from $9.2 billion and well below expectations. Corporate earnings were also weaker than expected, and management cut its full-year earnings forecast to a range between $3.25 and $3.30 per share, down from the previous range of $4.20 to $4.40 per share. These kinds of numbers aren’t good, and they surely won’t get a stock market to go up. E.I. du Pont’s stock chart is below:

dupont co stock chart

Chart courtesy of www.StockCharts.com

Another benchmark stock that is also reducing its outlook is United Technologies Corporation (NYSE/UTX), which is a company I follow closely, due to its diversified exposure to the U.S. economy. (See “What Many Blue Chips Are Signaling.”) The company’s corporate earnings beat the Street’s expectations, but revenues missed slightly. The company lowered its full-year revenue guidance but expects corporate earnings to meet current expectations, due to an increased restructuring plan. Translation: business isn’t improving, so the company needs more job cuts to keep its corporate earnings from declining. Again, these numbers aren’t good enough to get the stock market moving higher. United Technologies’ stock chart is below:

united technologies corp stock chart

Chart courtesy of www.StockCharts.com

I’m worried about this stock market. So many benchmark stocks have reported revenues that have come in below consensus and corporate earnings growth is flat. With outlooks coming down and many benchmark stocks already breaking their 50-day moving averages (MAs), I’d say the stock market is going lower—much lower over the near term.

What will temper this pullback is the stock market’s fair valuation. Depending on what happens with Chinese economic news, we could get a meaningful pullback, followed by a consolidation over the next month. Investor sentiment isn’t bad enough quite yet; the stock market’s been going up since June. All in all, this is a market that is highly vulnerable and caution is the name of the game. Unless the economic news gets better, revenue and earnings expectations will continue to decline.

About the Author, Browse Mitchell Clark's Articles

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 »