For the second quarter of 2015, companies in key stock indices like the S&P 500 reported a decline of 0.7% in their corporate earnings. This was the first decline in profits since the third quarter of 2012.
But what was more alarming was that revenues for the S&P 500 companies plunged 3.4% in the second quarter. For two consecutive quarters now, revenue for the S&P 500 companies have contracted. This hasn’t happened since the U.S. economy was in the midst of the Great Recession. (Source: FactSet, August 28, 2015.)
Forecasts for the third quarter don’t look any better; 76 companies on the list of S&P 500 companies have already issued negative guidance for their earnings per share. Stock market analysts expect earnings for the S&P 500 companies to contract 4.1% in the third quarter and then decline another 1.8% in the fourth!
Where’s the Stock Market Headed Next?
At the beginning of this year, I issued my annual stock market forecast, wherein I said 2015 would be a terrible year for stocks. The chart below shows how the S&P 500 looked going into 2015 and where it is now.
Chart courtesy of www.StockCharts.com
As you can see, the uptrend that began in 2009 for the S&P 500 is now clearly broken. The most basic principle of technical analysis states that the “trend is your friend until broken.” What is also very important is that the decline in stock prices is happening on increasingly rising volume; this tells us investors are exiting stocks.
Is the Buying Point Close?
Looking at the recent past, when key stock indices fell 10% from their peaks, the “play” was “buy on the dip.” And every time since 2009, a 10% correction in the stock market was followed by higher stock prices. But this time, dear reader, it is very different.
It’s different because we have corporate earnings and revenues contracting, we have economies struggling for growth around the world, countries that are competing against each other to lower the value of their currencies to improve trade, and we already have record-low interest rates.
Domestically, the Federal Reserve has printed about $4.0 trillion in new money to stimulate the economy. From what I’ve seen since 2009, the stock market rise has been more about the Federal Reserve’s easy money policy than anything else. Each time the Fed launched QE1, QE2, and QE3, stock prices rose. And until we get some new form of QE4, I can’t see how this stock market will do an about-face and start rising.