S&P 500 Earnings Recession Enters Fourth Quarter: What It Means for Stocks
Profit Confidential
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S&P 500 Earnings Recession Enters Fourth Quarter: What It Means for Stocks The S&P 500 is in an earnings recession. The blended earnings decline in the first quarter was -7.1% and marks the first time the S&P 500 has seen four consecutive quarters of year-over-year declines in earnings since 2008. Analysts expect earnings growth to return in the second half of 2016, but they said something really similar last year at this time. The U.S. economy is fragile, consumer sentiment is tumbling, and the earnings recession shows no signs of slowing down.
Roughly 87% of companies in the S&P 500 have reported first-quarter earnings. The blended sales decline for the first quarter of 2016 is -1.6%, a far cry from the forecasted decline of one percent at the end of the quarter, way back on March 31. (Source: "Earnings Insight," FactSet, May 6, 2016.) For those who think making money is important when determining the valuation of a stock, the first-quarter blended earnings decline is -7.1%. That's better than the forecasted estimated earnings decline of -8.7% announced on March 31. But...it's not quite as accurate as the 0.3% growth predicted at the beginning of the quarter. The first-quarter blended earnings decline of -7.1% marks the first time the S&P 500 has seen four consecutive quarters of year-over-year declines in earnings since the fourth quarter of 2008. Ever-optimistic investment managers believe earnings have bottomed and will start to rise, breathing life into the unfairly maligned, down-on-its-luck bull market. On one hand, they have pretty much said the same thing over the last four quarters. Before that, they never even predicted an earnings recession. So I'm not so sure how accurate their crystal balls are.
Again, markets are only as strong as the underlying stocks that go into making up the index. If the immediate past and present is any indicator of future success, Wall Street is in for another round of disappointments. It's tough to see how the second half of 2016 is going to save the day when the U.S. economy is barely registering a heartbeat. Right now, it seems like the magic number is 0.5%. Federal Reserve Chair Janet Yellen kept the key lending rate unchanged in the range of 0.25% to 0.50%. The Fed cited a slowing U.S. economy, moribund consumer spending, and weak global economy as reasons for its less-than-optimistic take on the U.S. economic recovery. (Source: Federal Reserve Statement, Board of Governors of the Federal Reserve System, April 27, 2016.) The U.S. economy is stuck in cartoon quicksand. In the U.S., the first-quarter gross domestic product (GDP) advanced an appalling 0.5%. Admittedly, analysts weren't expecting too much; they forecasted first-quarter GDP to come in at just 0.7%. Still, their weak projections were far too hopeful. It's almost as if they don't have their pulse on Main Street America. According to the University of Michigan Consumer Sentiment Index, consumer sentiment has been declining since the beginning of 2015. The index is currently at 89, a 10% decline from January 2015. In a best-case scenario, one where the economy is going to get better, we'd see consumer sentiment increase. In addition to tired, pessimistic consumers who simply can't spend what they don't have, we've now entered the typically weakest part of the year. Sell in May and go away? Even if this doesn't happen, it appears the earnings recession is going to continue. Investors can normally rely on the markets to warm up as summer turns into fall. Well, that is true, except in an election year. Ghastly earnings and revenue aside, stocks tend to peak about six months ahead of the November election. The earnings recession is now in its fourth quarter. With no new economic data to suggest the worst is over, there's every reason to think the earnings recession could stretch into 2017. | |||
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Number One Reason Why Gold Could Hit $5,000 an Ounce Gold prices have been trading in a range for more than two months now. Sadly, investors seem to be nervous. They are asking one question: should I ditch the yellow precious metal?
As I see it, gold investors shouldn't be too discouraged by the price action over the past couple of months whatsoever. In fact, they should be thankful and know there could be much more upside ahead in 2016 and beyond. Let me explain... If you are bullish on gold bullion for the long term, you want the prices to go up slow and steady. We saw a big rally in the first two months of 2015 and over the past two months, prices have been trading sideways. Contrary to popular belief, this is actually good! Why? Well, when there are spikes and massive moves in prices in a very short period of time, it means speculators are present, rather than there being sustainable buyers. The sideways price action we see in the gold bullion market right now, as I see it, is filtering out those speculators. I reiterate, don't be too worried about this. What I am really excited about is the demand for gold bullion despite the higher prices, especially the demand from buyers who tend to hold gold for the long term—the central banks and consumers. It almost seems as if there's a gold rush. Their demand is astonishing, but I guarantee you won't hear much about it in the mainstream media.
Take the central bank of China as one example. In the first three months of 2016, it purchased 35.14 tonnes of the yellow precious metal. Don't just pay attention to the number of tonnes it bought, though; pay attention to the fact that it's consistently buying. (Source: "Changes in World Gold Official Reserves," World Gold Council, last accessed May 10, 2016.) The central bank of Russia added close to 46 tonnes of gold bullion to its reserves, too. And the fourth quarter of 2015 marked the 20th consecutive quarter that central banks purchased gold bullion. It will not be shocking to hear if the first quarter of 2016 was the 21st quarter that central banks were net buyers of gold. As for consumers, one way to see their demand is by looking at gold sales at mints around the world. In the first four months of 2015, the U.S. Mint sold twice as much gold bullion in American Eagle coins than it did last year. (Source: "Bullion Sales/Mintage Figures," U.S. Mint, last accessed May 10, 2016.) Other mints around the world are reporting staggering demand figures as well. I can't say this enough times: if you are ignoring gold bullion and gold-related investments right now, you could be making a grave mistake. Gold bullion prices are severely undervalued. The yellow precious metal came under fire for all the wrong reasons a few years back. Now, the market's fundamentals are different. I will end with the following forecast: We could be on the cusp of another bull market in gold prices at this time. The yellow precious metal increased roughly 500% in the previous bull run. If we assume this time that we are in for similar returns, then we could easily be seeing $5,000-an-ounce gold. Obviously, time will tell. |
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You Won't Be Bearish on Apple Inc. After Reading This Everyone loves to hate Apple Inc. (NASDAQ:AAPL) stock these days. It has all the necessary ingredients to be a short seller's favorite in today's market condition. But if you decide to become an Apple stock bear just because of what other people are saying, well, you'd be missing out on a huge opportunity.
I'm no Apple fan boy. Among my smartphone, tablet, and laptop, only one of them is made by Apple. What I like more is Apple stock. At today's price, its value is just too hard to ignore. Shares of the Cupertino, California-based company were already in the doldrums. Since falling from more than $132.00 apiece last July, AAPL stock shares were traveling on a path filled with lower highs and lower lows. That's not a good sign from a technical point of view. After a disappointing earnings report, all hell broke loose. Since Apple reported on April 26, its share price has plunged another 13.2%. That's more than $70.0 billion in market cap evaporating in less than three weeks! Now, it's time to remind ourselves what billionaire investor Warren Buffett said: "Be fearful when others are greedy and greedy when others are fearful." Also note that Warren Buffett is a value investor and for many of his successful picks, he bought them when they were trading at less than 10X their earnings. What is Apple's price-to-earnings multiple right now? It's 9.63X. Of course, this coincidence of numbers and sentiment does not translate to Warren Buffett endorsing Apple stock. But there's more...$32.9 billion more.
To many tech companies, it would be great if they could earn that amount in revenue in an entire year. For Apple, it only took a quarter—and it's not even Apple's entire quarterly revenue. That $32.9 billion is just the net sales of one product: the "iPhone." What's more impressive is that this was not a quarter with a major update. Apple is expected to launch its flagship "iPhone 7" this September. Many of those who want to update their phones will probably wait until the iPhone 7 is launched. Still, somehow, the company sold 51.2 million units of the device during the quarter. Here's another number: one billion. That's the number of active devices in Apple's ecosystem. The company uses its own operating systems on all its products—including the iPhone, "iPad," "iMac," "MacBook," "iPod," "Apple TV," and "Apple Watch." What this means is huge monetization opportunities for the company. With such a giant userbase, Apple could launch a service and instantly turn it into a big hit. In fact, it just did that. Remember when the company launched "Apple Music" last year? A lot of people doubted it because the industry was already dominated by the incumbent, Spotify. Yet in less than a year since its launch, Apple Music has amassed more than 13 million paying subscribers. (Source: "Apple Timothy Donald Cook on Q2 2016 Results-Earnings Call Transcript," Seeking Alpha, April 26, 2016.) Building a services empire on top of its hardware device business is a great strategy for Apple. In its most recent fiscal quarter, the company generated $6.0 billion in services revenue, representing 20% growth year-over-year. (Source: "Q1 2016 Unaudited Summary Data," Apple Inc., January 26, 2016.) One more thing: Apple has more than $200 billion in cash on hand. I'll skip what this means for dividends and buybacks because every analyst has already talked about that. Instead, I see it like this: if someone in this world is working on the next big thing, having a pocket full of cash would give you a chance to buy it or develop your own version. And I haven't even mentioned driverless cars. That project is still in the works and has the potential to make huge amounts of money for the company. But even without it, Apple stock still has plenty of go left. | |||
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