Here's a summary of Q2 earnings season thus far: The reports,
from the financial sector to utilities (NYSEArca: XLU), absolutely
In fact, negative to positive earnings guidance for S&P
companies (NYSEArca: SPY) for Q2 is the worst since the
Financial Crisis in 2008.
Before we get into the gory details, let's look at just one of
the industry sectors that was supposed to "lead" earnings growth;
The hot performance of financial stocks (NYSEArca: XLF) belies
their real life lackluster Q2 earnings results and deeper
problems within the sector.
Goldman Sachs (
) reported an 11% fall in second quarter profit and its $16.6
billion of revenue during the first six months are 14% lower from
last year. Goldman's corporate earnings declined to their lowest
level since 2005. Their return on shareholder equity also
More worrisome, is the lingering habit of financial/banking
stocks to blindside shareholders with nasty and unwelcome
JPMorgan Chase (
) is dealing with a massive trading loss that could top $6 billion
and possibly be as high as $9 billion. JPM posted a 7%
decline in profits compared to a year earlier. Question: If a bank
posts a one-time loss next quarter in addition to the latest
quarter's losses, does that make it a two time loss or a one-time
quarterly loss twice?
Bank of America reported Q2 EPS of 0.33 and beat estimates
mainly due to a low hurdle compared to a large loss reported for Q2
2011. If we exclude Bank of America, the projected earnings growth
rate for the S&P 500 falls from 3% to -1.7%.
What about risk? How are companies within the financial sector
While JP Morgan's lack of risk management prowess has captured
the public's attention, what about Citigroup? Citi's net exposure
to Greece, Ireland, Italy, Portugal, and Spain was $9.1 billion at
the end of the second quarter - up from the previous quarter!
Citigroup reported a 12% decline in second quarter earnings.
Here's another problem: Three consecutive months of lower retail
sales. June's Retail Sales Report (NYSEArca: XRT) showed a -0.5%
month-over-month decline following -0.2% in May and another -0.5%
in April. Not only do the latest retail sales figures mark the
longest streak of MoM sales declines from the July-December 2008
period, but it means that previously cheery GDP estimates will
Gasoline stations suffered the largest sales declines, which is
curious. Typically, lower gas prices (NYSEArca: UNG) gives
consumers more money to spend, but they aren't spending. If
anything, consumers are hunkering down.
Unlike the dot com bust in 2000, the aftermath of the Financial
Crisis and the Great Recession has taken a toll. The year-over-year
change of 3.8% for retail sales is the weakest since mid-2010. Can
the U.S. economy recover without consumers? What about the stock
A 'Mean' Reversion to the Mean
The chart below plots the S&P 500 against earnings since 1998.
All major market tops coincided with record earnings and Q1 2012
operating earnings established a new peak. On April 2, 2012, the
S&P peaked at a closing high of 1,419.
Earnings projections for the remainder of 2012 are around $105 and
2013 expectations are a rosy $119. The chart shows the
direction of earnings projections at previous highs or lows.
Analysts did not see any of the mean reversions coming (just like
now), but mean reversions are hidden in plain sight.
Profit Strategy Newsletter
visually and statistically illustrates the massive risks associated
with owning stocks when earnings have peaked and when the global
economic environment is worsening.
It's important to view the recent market action in combination
with technical indicators. The Fed has been able to "game"
fundamental market forecasting, but not technical indicators. One
of those indicators is support/resistance levels.
Once stocksbreak below key support levels they tend to drop much
further as selling creates panic (like in 2010, 2011 - imagine a
person walking on thin ice; once the ice breaks, the fall happens
The ETF Profit Strategy Newsletter pinpoints the key support
level - that once broken - will be a sell signal and likely lead to
much lower prices.