PROFIT CONSENSUS (Negative Consensus/Bull Market Indicator) U.S. expectations turn negative for first time since 2009

October 3, 2015

Stock prices are ultimately driven by profits. If we look at latest expectations for company profits in the US, it doesn't bode well for stocks. For the first time since 2009, forward earnings per share expectations have gone negative. 

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More and more US company profit growth is being driven by international sales rather than domestic sales. 

"...Notably, S&P 500 companies generate nearly half of their sales overseas. Many of these companies have been able to outperform the US by taking advantage of the massive growth opportunities in emerging markets, like China.

But overseas exposure has now gone from advantage to disadvantage as overseas growth sputters while domestic growth remains healthy.

FactSet's John Butters recently compared the expected revenue and earnings for S&P 500 companies with over 50% of sales generated in the US against companies with over 50% of sales generated abroad. What he observed were two dramatically different stories.

The estimated earnings decline for the S&P 500 for Q3 2015 is -4.4%. For companies that generate more than 50% of sales inside the U.S., the estimated earnings growth rate is 3.1%. For companies that generate less than 50% of sales inside the U.S., the estimated earnings decline is -14.1%.

The estimated sales decline for the S&P 500 for Q3 2015 is -2.9%. For companies that generate more than 50% of sales inside the U.S., the estimated sales growth rate is 1.4%. For companies that generate less than 50% of sales inside the U.S., the estimated sales decline is -12.1%.

"The key to the outlook for global equities is earnings, with global valuations in line with historical averages, a supportive monetary policy backdrop, and very bearish sentiment, a major hit to [earnings per share] is the main risk for the market," Barclays' Ian Scott wrote in a note to clients.

Another important factor has been ultra low interest rates that allowed companies to finance share buybacks and dividend payments with cheap money. This form of financial engineering has deadened somewhat the dearth in revenue growth. There have been rumblings that the cheap money era will be ending as the Federal Reserve contemplates increasing interest rates. They have claimed that the timetable for rate increases will be data dependent. Well with low profit expectations out there, it might be enough for them to hold off increasing rates in the short to medium term. If the Central Bank continues to get cold feet then it could provide enough incentive for stock prices to resume its ascent.