Beginning this week and continuing over the next month or
so, results from thousands of American companies will be reported as we move through
third-quarter reporting season.
While there's always plenty of anxiety and a lot riding on
earnings season, there's much more at stake this time around because S&P
500 companies are facing the first earnings recession since this bull market
began in 2009.
And if the trend in S&P sales and profits doesn't
improve soon, we could soon be facing a new bear market for stocks.
Earnings-per-share results for S&P 500 companies are on
pace to decline 5.5% year-over-year for the third quarter. That would mark the
second straight quarterly drop in profits, for the first time since early 2009!
Even more troubling, top-line sales for S&P 500 stocks
are on track to decline for the third-straight quarter, with a 3.3% decline
forecast by analysts.
What's more Wall Street is expecting another sales and earnings
decline during the fourth quarter of 2015 as well.
Considering the market volatility investors have experienced
since July, plus weakening data reports on the U.S. economy, the LAST thing
investors need to worry about right now is an oncoming earnings recession.
Profit margins peaked
at 10.5% for S&P 500 companies earlier this year and investors are beginning to ask: Was this as
good as it gets for this business cycle?
It becomes a critical question because of the glaring lack of top-line sales
growth for the past nine months in a row.
Buying Opportunity!
The last time oil prices sank below $50 a barrel, the best
oil and energy stocks handed investors like you TRIPLE-DIGIT profits! Over the
past two years, the world's energy markets have been hit with the equivalent of
a HYDROGEN BOMB. The price of oil lost HALF its value in the first half of
2015, sinking to levels last seen during the depths of the 2009 recession.
Profit margins expanded in recent years based mainly on a
combination of:
1. Cost-cutting
2. A lack of investment in capital equipment, and
3. Record share buybacks by public companies
But without organic sales growth, sooner or later, something's
got to give on the bottom line. Even if sales stayed flat, there are not a lot
of excess costs left to cut in order to boost earnings growth.
In an environment like this, it's critically important to
pay attention to which stocks and sectors are still capable of growing their
top and bottom lines, and which can't.
It will be much more of a stock-pickers market now, with
investors willing to pay a premium for the few companies that are able to
maintain growth.
With that in mind, let's take a closer look at the sectors
that are expected to contribute the most and the least to third-quarter
results.
The ugly: The worst offenders this quarter are likely to be
energy and basic materials stocks, which has been a familiar theme. Plunging
oil and gas prices along with the freefall in many other commodities is likely
to keep these companies reporting dismal results this quarter and beyond.
In fact, energy stocks in the S&P 500 are expected to
post a 64.3% earnings decline this quarter, while basic materials profits are
forecast to drop 18.5%!
The bad: Earnings growth for S&P 500 industrial sector
stocks has been decelerating for the past two quarters, and profits are set to
decline 5.7% in the third quarter.
This is troubling sign that weakness in energy and materials
is spilling over to other cyclical sectors of our economy.
The good: On a positive note, health-care stocks are set to
report sales up 8.1% from a year ago with earnings per share advancing 6.3%.
Another good sector, financials are expected to post profit growth of 4.3%
while revenues jump 4.9% for the quarter.
Perhaps not coincidentally, our own Weiss Stock Ratings model
also favors financial stocks right now. The majority of financial stocks we cover
(62.2%) earn a buy rating at present, or 383 buy-rated stocks in all.
Bottom line: Keep a
sharp eye on corporate sales and profit results over the next several weeks,
because it could be a key catalyst to determine the direction for stocks. If
results generally come in better than expected, select buy-rated financial
stocks might be a good place to look for new buy candidates. Good investing, Mike
Burnick
Source: Money and Markets
Comments
There are
tree economies. The Stock Market economy can be thriving while the main street
economy is sinking. It is, in part, helped by trade agreements that lower
corporate costs short-term. It has
resulted in “trickle up redistribution” of wealth. Corporations off-shore jobs
to lower their costs, but it reduces US jobs.
Longer term, corporations lose revenue in the US, because consumers
experience job loss. Immigration is a big driver in US unemployment, loss of
household income and lower demand. Decreasing demand overseas lowers profits
further. At some point, corporations
need to choose what countries they want to support. That would be those
countries that will provide the most demand.
If
corporations kill off US consumers, they will have to make their money
elsewhere. The private sector Mail Street economy is also shrinking. The Government economy is growing, but should
cut unnecessary spending or it will further destroy the Main Street economy and
Stock Market economy.
Norb
Leahy, Dunwoody GA Tea Party Leader
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