Stock Market Rally Fizzles as 2Q13 Corporate Earnings Growth Fades

The stock market is down 500 points in just over a week…does this mean the Dow Jones Industrial Average has finally topped out?

Corporate earnings are weak; we know that. So far for the second quarter of 2013, more than 80% of the companies in the S&P 500 that have issued their corporate earnings guidance have provided a negative outlook. (Source: FactSet, May 31, 2013.)

Yes, the key stock indices have gotten ahead of themselves. In the first two months of the second quarter, the S&P 500 increased five percent; but as that was happening, earnings estimates for the quarter dropped by 3.4%!

At the end of March, analysts expected the S&P 500 companies to register an increase of 4.4% in their corporate earnings for the second quarter; now that number has dropped to a paltry 1.3%. (Source: FactSet, May 31, 2013.)

In the first quarter of 2013, companies in the key stock indices struggled with revenue growth. Only 46% of the S&P 500 companies recorded revenues above estimates for the first quarter, while the average for the last four quarters was 52%.

But there are further threats to corporate earnings. Demand is weak in the U.S. economy, as the American consumer is still under pressure—he or she is typically working at a job that pays the minimum wage (that’s where most of our jobs growth has been since the Great Recession ended), while the costs of basic necessities continue to rise in an environment where the government says there is no inflation.

I remain skeptical of the rise in the key stock indices, as they aren’t moving in line with the current business conditions in the U.S. economy. I continue to believe the bear market rally, which began in 2009, has done a great job in luring investors back into the stock market. The key stock indices are up significantly and have given investors a false hope that they will climb further.

The S&P 500 has been making lower lows and lower highs since May 22 (as you can see in the chart below), but from what I’ve read from stock advisors, they say to buy on dips—advice I’m not following.

Stock Market Rally Fizzles as 2Q13 Corporate Earnings Growth Fades image spx s and plarge cap index chartStock Market Rally Fizzles as 2Q13 Corporate Earnings Growth Fades

Chart courtesy of www.StockCharts.com

What’s going on with the equity markets right now reminds me of 2007 all over again—that’s when the key stock indices were moving higher, regardless of what was happening with the economy. We are experiencing something similar to that right now, with the stock market and economy having gone in such opposite directions.

Predicting the exact point at which the top will be in for the stock market is difficult, if not impossible, but odds are we are very close.

What He Said:

“Prepare for the worst economic period ahead that we have seen in years, my dear reader, as that is what I see coming. I have written over the past three years how, in the late 1920s, real estate prices fell first before the stock market and how I felt the same would happen this time. Home prices in the U.S. peaked in 2005 and started falling in 2006. The stock market is following suit here in 2008. Is a depression coming? No. How about a severe deflationary recession? Yes!” Michael Lombardi in Profit Confidential, January 21, 2008. Michael started talking about and predicting the economic catastrophe we started experiencing in 2008 long before anyone else.

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