Look at Earnings: They Say a Stock Market Crash Could Become Reality
A stock market crash could be ahead. If you own a lot of stocks, it may be time to pause and reflect.
You see, earnings matter a lot. Stocks increase in value if earnings are expected to get better. If they are expected to be bad, we often see a stock market crash.
To say the least, earnings have been bad lately. Consider this: in the first two quarters of 2019, S&P 500 companies registered a decline in earnings year over year. We haven’t seen anything like this since early 2016.
Here’s what’s more troubling: this is not all. Going forward, earnings are expected to get worse.
So far, 79 S&P 500 companies have issued negative guidance about their earnings per share while 30 have issued positive guidance. In other words, for every one positive guidance, we have almost three negative ones. (Source: “Earnings Insight,” Factset, August 20, 2019.)
Wall Street analysts are severely pessimistic as well. They are projecting S&P 500 companies to report a year-over-year decline of 3.5% in earnings in the third quarter of 2019.
Just a few months ago, these analysts were expecting S&P 500 companies to report earnings growth in the third quarter.
These Factors Could Hurt Earnings Further
Don’t just stop there; earnings could get much worse. There are several factors at play that could make a lot of headwinds for corporate America.
Don’t overlook the trade war between the U.S. and China. You must understand, when two of the biggest economies in the world fight a trade war, there will be victims.
Companies have already started to talk about tariff- and trade-related issues in their conference calls. It could start to hurt their revenues and earnings soon.
The global economy is slowing down too. If you aren’t following what’s happening in major economic hubs around the world, you could be making a big mistake.
Economic data across the globe looks dire. The eurozone could be headed toward another recession, Britain is struggling with Brexit and its economy has been taking a hit, Japan remains stagnant, emerging-market economies are struggling, and the list goes on.
Furthermore, in 2018, 42.9% of the sales at S&P 500 companies came from outside the United States. In other words, almost $0.43 of every $1.00 of sales at S&P 500 companies came from outside the country. (Source: “S&P 500 Global Sales,” S&P Dow Jones Indices, last accessed September 5, 2019.)
If global growth slows down, a large portion of sales could be on the line and it could hurt profitability.
Lastly, the U.S. economy is slowing down. There’s tons of economic data suggesting that U.S. economic growth is not close to its historical average, and there are even indicators that say a recession could be nearing.
Economic slowdown in the U.S. economy could be very bad for earnings, which would then be bad for stock prices.
Stock Market Outlook: Next Stock Market Crash Could Be Big
Dear reader, there’s still a lot of optimism around these days. Don’t get lured in by it though. The most basic thing that drives the stock market, earnings, have been deteriorating.
With this, it’s very hard to be bullish on stocks at the moment. If earnings continue to decline, don’t rule out a stock market crash. Mind you, I believe that the next stock market crash could be a big one, and it could happen much sooner than many think.