The Catastrophe Called Collapsing Corporate Earnings Growth

89 of SP 500 Companies Issuing Negative Earnings GuidanceI keep telling you about my suspicion that the backbone of any stock market—corporate earnings growth—is disappearing. Now, we see it in the numbers…

Of the 106 companies in the S&P 500 that have issued corporate earnings guidance for the fourth quarter, an astounding 94 of them have issued negative guidance—that’s 89% of the companies issuing guidance, warning it will be negative, which is well above the five-year average rate of 63%. (Source: FactSet, December 13, 2013.)

And analysts continue to drop their expectations for corporate earnings growth for the fourth quarter. As of September 30, analysts expected fourth-quarter corporate earnings growth in the current quarter would be 9.5%. By last week, that rate had come down to 6.5%. (Source: Ibid.) I expect corporate earnings growth for the fourth quarter will continue to disappear.

So we have 2013 ending with the smallest increase in corporate earnings since 2009. How can 2014 be any better?

The risks that disappearing corporate earnings growth creates for the key stock indices continue to be ignored. And problems in the global economy are mounting, not improving, with each passing day.

Economic growth in China, the second-biggest economic hub in the global economy, is declining rapidly. The country is expected to post a growth rate this year that is “embarrassingly” low compared to China’s historical economic growth rate. Manufacturing activity in the country is rapidly declining. The HSBS Flash China Manufacturing Purchasing Managers’ Index (PMI) dropped to a three-month low in December. (Source: Markit, December 16, 2013.)

We are seeing an economic slowdown in the stronger eurozone nations like France. In December, manufacturing activity in this second-biggest eurozone nation, and fifth-biggest economic hub in the global economy, plunged to a seven-month low. The Markit Flash France PMI registered at 47 in December, down from 48 in November. (Source: Markit, December 16, 2013.) Note: any reading below 50 on the PMI suggests a contraction (recession) in the manufacturing sector.

How long can this go on…the stock market rising but corporate earnings straining and economies around the world slowing? Dear reader, be very mindful of the bear dressed in bull’s clothing. The bear has done an excellent job in making investors comfortable with key stock indices again. Don’t believe it. Just at the point where the bear convinces the majority of investors the stock market is a safe haven again (we are almost there), that’s when the bear will pull the rug out from under investors one more time.

Note from Michael…

While the price of gold bullion doesn’t reflect it, consumer demand for gold bullion is going through the roof.

So far this year, the U.S. Mint has sold 237,000 ounces of gold bullion in 24-karat American Buffalo coins. In the entire year of 2012, the U.S. Mint sold only 132,000 ounces of the same coin! This represents an increase of almost 80% from the previous year. (Source: U.S. Mint web site, last accessed December 16, 2013.) Mind you, the year 2013 hasn’t ended yet; expect this number to be much higher by the year’s end.

I am not focused on the short-term movement of gold bullion prices. I am looking at how gold will perform over the long run. What we see right now in gold trading around $1,200 an ounce is an opportunity for long-term investors.