One of the themes that I’ve been reiterating over the past few months has been my concern over the potential for growth in corporate earnings. While companies in the S&P 500 have reported extremely strong corporate earnings over the past few years, we might be reaching a peak in the cycle.
As you know, businesses and the economy move through a cycle, from the trough to the peak and back down. Following the depths of the recession in this cycle, companies in the S&P 500 instituted significant cost-cutting and share buyback strategies, which have helped boost corporate earnings significantly, sending the economy up toward the peak.
But at some point, you can’t cut costs any further and revenues need to accelerate. This is my worry for many S&P 500 companies; if revenues aren’t growing, at some point, corporate earnings will begin to disappoint expectations, and the cycle will head back downward.
New data reported by FactSet Research Systems Inc. (NYSE/FDS) indicates that a record number of S&P 500 companies are issuing negative guidance for corporate earnings since the company began tracking this data in 2006. (Source: FactSet Research Systems Inc. web site, last accessed October 2, 2013.)
So far, 89 companies out of the S&P 500 have issued negative guidance for corporate earnings, while only 19 have issued positive earnings guidance. The previous high for companies in the S&P 500 issuing negative guidance was 88 firms during the second quarter of 2013.
It’s interesting to note that as the S&P 500 made new all-time highs this year, earnings guidance is continually being revised downward. The 19 firms so far issuing positive corporate earnings guidance will also set a record for the lowest number of companies issuing better estimates ahead of corporate earnings season.
One of the sectors that are leading in issuing negative corporate earnings guidance is one that I’ve continually warned readers about: the consumer discretionary segment. In addition, the industrial, information technology, and financial sectors are also issuing negative corporate earnings guidance within the S&P 500.
As long-time readers know, over the past few months, I’ve been continually warning you about stocks in the discretionary market segment. While the S&P 500 has held up well overall, my belief for most of this year has been that corporate earnings in the discretionary segment will disappoint investors’ expectations.
We have continually seen a lack of revenue growth in many discretionary items, which stems from a lack of increase in wages for the average American and is further squeezed by increasing interest rates and energy costs. With jobs growth still lackluster, wages will not increase until more Americans are employed and feel certain about their financial situation.
The data back up what I’ve been forecasting for months: discretionary stocks will most likely disappoint, as corporate earnings fail to live up to investors’ expectations. With more companies in the S&P 500 struggling to increase revenue, we could see a further deterioration from a fundamental point of view. Once the technical picture starts to break down, this could trigger significant selling pressure.
Making money over the long term is as much about avoiding bad companies as it is picking winning stocks. For the time being, I’d avoid the discretionary sector within the S&P 500 until we see clarity regarding corporate earnings going forward.
This article S&P 500 Companies Issuing Negative Guidance Hits Record High originally published at Investment Contrarians by Sasha Cekerevac