The concept of corporate earnings being the single biggest factor that drives key stock indices like the S&P 500 higher has been thrown out the window.
While I continue to see analysts issue buy recommendations for the S&P 500, the fact of the matter is that profits at companies that make up the S&P 500 are declining. For the first quarter of 2014, corporate earnings for the S&P 500 companies are actually expected to decline by 1.6%. (Source: FactSet, April 11, 2014.) That’s the biggest drop in public company profits since 2009!
But the stock market doesn’t care if corporate earnings are declining…just like it doesn’t care if interest rates are rising. These are clear signs the market is acting irrationally—an indicator of a stock market bubble.
Just look at what happened with The Coca-Cola Company (NYSE/KO). This well-known S&P 500 company reported that its first-quarter 2014 corporate earnings declined by eight percent and revenues dropped four percent compared to the same period one year early. (Source: The Coca-Cola Company web site, last accessed April 15, 2014.)
But the market took Coca-Cola’s stock price higher on the bad results!
Below is the chart of Coca-Cola’s stock price, just as the markets opened (circled area) after the company reported its poor corporate earnings results. The stock gapped up 2.8%! This confirms my take that the fundamentals don’t count anymore to investors.
At the end of the day, all of this seems too familiar to us. This is what we have seen prior to other stock market sell-offs: investors discounting all forms of time-proven stock market valuations because they believe stock prices will keep rising no matter what.
I see the upside for key stock indices like the S&P 500 as being very limited and the probability of a massive downside move is very likely.