The Stock Market Rally Is a Big Fat Lie


  • S&P 500 Index shatters new report excessive on Monday.
  • Fairness markets are rallying regardless of a three-quarter decline in company earnings – the longest stretch since 2015-16.
  • U.S. companies are getting higher at enjoying the expectations sport.

The Wall Road expectations sport has created an artificially low hurdle for corporations to clear each earnings quarter. Living proof: Company America is again in a technical earnings recession, but shares are pushing report highs once more.

One other Disappointing Earnings Quarter for Wall Road

U.S. shares raced towards report highs on Monday after a pair of earnings studies from Walgreens Boots Alliance (NYSE:WBA) and AT&T (NYSE:T) got here in higher than anticipated.

Earnings-inspired positive factors have been happening for a couple of weeks now, with buyers rallying behind constructive headlines from huge banks and know-how juggernauts. The downside with this image is that company earnings have been poor when in comparison with final yr.

By Friday’s shut, 40% of the businesses within the S&P 500 reported third-quarter outcomes. Their blended earnings decline for the quarter is three.7%. in keeping with FactSet. In different phrases, earnings are down practically four% in contrast with a yr in the past. If the development continues (and it appears like it’s going to), Q3 2019 would mark the third consecutive quarter of year-over-year revenue declines – the longest stretch in three-and-a-half years.

Vitality and know-how sectors are the largest contributors to unfavorable earnings development for corporations with extra international publicity. | Chart: FactSet

Regardless of the downtrend, FactSet says 80% of corporations to have reported to date have exceeded Wall Road’s revenue expectations. Almost two-thirds (64%) have produced stronger than anticipated revenues. Maybe buyers haven’t clued in to the artificially low hurdle the Wall Road expectations sport has created. As FactSet knowledge clearly present, producing earnings which are ‘increased than anticipated’ doesn’t take very a lot.

Corporations are Getting Higher at Enjoying the Recreation

As MarketWatch reported all the best way again in 2016 over the last earnings recession, companies have “become more skilled” at playing the expectations game over the years. And that’s a tall order, too, since it requires suppressing guidance for several quarters (perhaps even years).

As Mark Hulbert reported at the time,

“Beating expectations has now become expected…”

Several companies have already laid the groundwork for another ‘better than expected’ quarter to end the year. Already, 26 S&P 500 components have set the bar low with respect to Q4, issuing negative earnings guidance compared with only 12 that have released positive outlooks (and the positives are probably understated, too).

Macro Risks Weigh on Earnings

Corporations are trying to manage expectations at a delicate time for the global economy. A synchronized slowdown in global growth, U.S.-China trade uncertainty and the impact of a stronger dollar are all being felt on companies with exposure to international markets.

As CCN reported earlier this month, Corporate America is more likely to complain about foreign exchange rates than they are about the trade war. Recession fears and an apparent liquidity shortage in global banks catapulted the dollar to two-year highs in September. The dollar has since retraced much of that rally, but it should maintain support as quantitative easing and Brexit undermine other currencies.

As the Federal Reserve’s latest actions show, the dollar isn’t immune from the vicious cycle of money printing, but the U.S. economy is still in better shape than many of its advanced industrialized peers overseas. At least, that’s what GDP numbers show.

This article was edited by Josiah Wilmoth.

Last modified: October 28, 2019 19:17 UTC

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