A theme so far this earnings season is U.S. companies warning of an economic slowdown. With about half of the S&P 500 companies having reported already, many are citing protracted declines in production, sales, and employment that will track into 2016.
The press is treating this as a surprise, yet I'm hard-pressed to understand how...
We've been talking about the decline in revenue and earnings for more than a year and prepared accordingly. I've shown readers how to move your money into the best quality companies and simultaneously tighten up your risk management controls - often at a profit.
But what's becoming more clear from this earnings trend is just how much the Federal Reserve's misguided policies have hurt the U.S. consumer - and how that will affect company revenue and share prices.
Just take a look at these numbers - plus I'll give you two stocks that will help your portfolio thrive in a slowing earnings environment...
Why Earnings Will Continue to Fall
So far this quarter just 41.5% of companies reporting have beaten quarterly revenue estimates. That's down from more than 70% in late 2009.
Earnings is the much more common stat to focus on for the simple reason that talking about the 77% of companies that have beaten earnings estimates so far this season is more palatable.
The problem - and what everybody is missing - is that you can fudge earnings. Any decent CFO can swing them by a few percent by drawing on reserves or using special accounting tricks or simple hedges.
But you cannot fudge top line numbers. Either you've got the sales or you don't.
The average S&P 500 company expects a profit drop of nearly 6% alongside a revenue drop of 3.3% in Q3. This revenue dip follows a 3.3% revenue decline in Q2 and a 2% fall in Q1, according to FactSet.
The last time we saw four consecutive negative quarters of revenue was 2008-2009. Falling revenue tells me one thing: Consumers cannot afford to pay up for the inflation the Fed thinks is so important.
New data from the Social Security Administration shows that 51% of working Americans - 1 in 2 - make less than $30,000 a year. The poverty line for a family of four is $24,250.
This is a scathing indictment of the Fed's policy; the middle class is being eviscerated. You have Middle America household wealth going down, people making less money, and people with less savings to begin with...
So companies are turning to serious discounting as a means of moving merchandise. That, in turn, causes profits to fall.
Look at Wal-Mart Stores Inc. (NYSE: WMT). The retail giant forecast a profit drop in 2016 of 6% to 12% when it reported Q3 earnings Oct. 14.
More than 100 million Americans shop at Wal-Mart weekly, so that dramatic drop in earnings projections tells me that the middle class is in more trouble than previously acknowledged. The recovery Washington thinks is moving along is actually shifting into reverse.
The troubled consumer/retail discounts/lower profits chain is a vicious cycle. For investors, it speaks to why we will continue to avoid consumer discretionary stocks for the foreseeable future.
This may take the press by surprise, but you can be prepared for slow earnings over the next few quarters. Continue to build defensive positions in companies selling "must have" products the world cannot live without.
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.