MorningWord 7/29/13: As a little more than 50% of the companies in the S&P 500 have reported Q2 earnings as of Friday’s close, we are starting to get some scorecards for the period, that are not likely to change to dramatically in the coming weeks as we get the balance of the results. In fact with most of the large financials having already reported, we could see a deceleration in the meager overall growth as per FactSet Research in their weekly Earnings Insight post:
The Financials sector has the highest earnings growth rate (25.6%) of any sector for the second consecutive quarter. It is also the largest contributor to earnings growth for the entire index. If the Financials sector is excluded, the earnings growth rate for the S&P 500 falls to -2.9%.
The cover of the Wall Street Journal this morning was echoing a slightly different theme on the same topic, with an article titled, Corporate Profits Lose Steam suggesting:
Earnings, meanwhile, are expected to decline 0.6%. That would be the first profit decline for non-financial companies since last autumn and the first time in a year that earnings grew more slowly than revenue, a sign that margin widening is petering out.
The article quoting Deutsche Bank economist David Bianco, warns of a continued business slowdown “without a pick up in business spending”, and warned:
the recently completed quarter marked the fourth of the past five quarters in which sales at S&P 500 companies grew more slowly than the U.S. economy, and there are few signs of a pickup ahead.
Why do I highlight the lackluster earnings and revenue growth?? Well if you were to just look at the SPX, less than 1% from the all time highs, one would think that at this stage of the recovery, after an unprecedented period of low rates and stimulus, that the economy would be firing on all cylinders, and that cyclical sectors like Tech, Industrials & Materials would have joined the party. They have not, and all of this comes at a time when earnings in fact could be headed for a deceleration if the FOMC were to misplay their hand in the coming months as it readies for a new chairperson in Jan and as QE may start to taper.
Not to sound alarmist, but after reading the above pieces I came across a post from Cullen Roche who writes the Pragmatic Capitalist blog (here), highlighting the recent rise in margin debt which is above 1999 levels, prior to the crash, and recently just matched the late 2007 levels:
Investors who have missed the very disliked rally are levering up to get IN, despite what appears to be a fairly weak backdrop, a global economy that does not seem able to stand on its own 2 feet.
So in my mind something has to give. The difficult issue for us all year has been timing, and it’s no different for the broader market at this juncture. I’m confident that stocks will see another deep selloff at some point in the next few months, if only because of positioning (not to mention the weak earnings backdrop that I discussed at the outset). That’s why the central bank releases this week are important. Not because they’re likely to say something new. But because they might result in selling that has been long delayed and overdue.