Where is S&P 500 headed? This question is being asked everywhere now days. Some mainstream stock advisors are saying that we are going to break the all-time high on the S&P 500 and the pullback in the market is temporary. They are chanting “Buy now or you will miss it.”
Sadly, I don’t think they are looking beyond the hype. There are more reasons to be worried than to cheer for a stock market rally. The S&P 500 and other key stock indices are missing the most basic ingredients that drive the markets to the upside: corporate earnings and business confidence.
So far, 468 of the S&P 500 companies have reported their third-quarter corporate earnings—that’s 93.6% of the constituents. Surprisingly, 71% have reported corporate earnings above what the markets were expecting, but only 40% of them beat the revenue expectations. The overall earnings for the third quarter for S&P 500 companies are down -0.2%. (Source: Factset, November 16, 2012.)
In addition to corporate earnings being dismal, businesses are also planning to scale back on spending and delay projects. They are worried about the uncertainties in the U.S. economy and the global economy—exports, a recession-infested eurozone, a slowing China, and the U.S. federal government’s budget plans. Business investments in equipment and software, a key indicator gauging the economic activity of corporate America, slowed down for the first time since early 2009 in the third quarter of 2012. (Source: Wall Street Journal, November 18, 2012.)
Some S&P 500 companies that are planning to cut capital spending include Texas Instruments Incorporated (NYSE/TXN), Harris Corporation (NYSE/HRS) and Apple Inc. (NASDAQ/AAPL). Similarly, Caterpillar Inc. (NYSE/CAT), another S&P 500 company, which expected to spend $4.0 billion in building and expanding this year, it is now retracting that target.
Looking forward, the corporate earnings pictures does not look like it will improve.
What we already know is that the S&P 500 companies are expecting their fourth-quarter corporate earnings growth to be worse than third-quarter earnings growth. I, for one, will not be surprised to see poor fourth-quarter 2012 earning growth from the S&P 500 companies.
For the stock market and key stock indices like S&P 500 to go up, corporate America needs to make money and spend. The stock market cannot run forever on artificially low interest rates, record government spending, and record money printing, just like a car can’t run on air. In the end, all stock markets rise or fall based on the corporate earnings growth of the companies that trade in the market. And I simply don’t see 2013 being a better year for corporate earnings growth in the U.S. than 2012.
What He Said:
“As for the stock market, it continues along its merry way oblivious to what is happening to homebuyers’ wealth. (Since 2005 I have been writing about how the real estate bust would be bigger than the boom.) In 1927, the real estate market crashed and the stock market, even back then, carried along its merry way for two more years until it eventually crashed. History has a way of repeating itself.” Michael Lombardi in Profit Confidential, November 21, 2007. A dire prediction that came true.