Get ready for another bad earnings season…
Once every three months, publicly traded companies report their financial results. We call this “earnings season.” It’s an important time for the markets.
Earnings season is when publicly traded companies answer the question “How’s business?” Earnings reports tell us if sales are rising or falling…and if companies are making or losing money.
As you likely know, earnings growth is good for stock prices. From December 2012 to March 2015, earnings for S&P 500 companies grew an average of 4.7% from the year before. Over that time, the S&P gained 43%…one of the strongest rallies of the last 10 years.
Two quarters ago, however, earnings for S&P 500 companies began to shrink. Earnings shrunk 0.7% in the second quarter of 2015 and another 1.5% in the third quarter. Since the second quarter of 2015, the S&P 500 has dropped 8.7%.
• Last Monday, aluminum giant Alcoa (AA) kicked off fourth-quarter earnings season…
Alcoa’s fourth-quarter sales were 18% lower than the previous year. The company also had a net loss of $500 million. For comparison, it made a $159 million profit during the fourth quarter of 2014.
• Wall Street expects S&P 500 earnings to drop 5.7% in the fourth quarter…
It would be the largest drop in quarterly earnings since 2009. It would also be the first time earnings dropped three quarters in row since 2009…when the U.S. economy was in its worst economic crisis since the Great Depression.
• Wall Street also expects a 3.3% decline in revenues…
Last year, first-quarter revenues declined 2.9%. Second-quarter revenues declined 3.3%. And third-quarter revenues declined 3.9%.
S&P 500 companies haven’t had four consecutive quarters of declining revenues since the 2008-2009 financial crisis.
• The S&P 500 is already down 8% this year…
Yesterday, the S&P 500 touched its lowest level since late August. As you may remember, the S&P 500 lost 11% in six days last summer.
On average, stocks in the S&P 500 are down 25% from their 52-week highs. And none of the major indexes have set new highs since July. The New York Stock Exchange, where more 3,700 stocks trade, is down 17% since May. The Russell 2000, which tracks 2,000 small U.S. stocks, is down 23% since June.
• Yet U.S. stocks are still expensive…
The S&P 500’s price-to-earnings (PE) ratio is 19.7. That’s 27% higher than its average PE ratio since 1917. A higher PE ratio means a stock or index is more expensive.
The PE ratio for the S&P 500 is higher today than it was a year ago. That may seem odd, since the S&P 500 went down 9% since then.
Stocks can get more expensive two ways: prices can rise, or earnings can fall. In this case, earnings are falling.
• The bull market in U.S. stocks is now 83 months old and counting…
It’s run 31 months longer than the average bull market since World War II.
Right now, earnings are falling, stocks are expensive, and the bull market is old. None of these things guarantee that the bull market will end soon. But they are reasons to invest cautiously.
We recommend holding a significant amount of cash right now. U.S. stocks will eventually be cheap again. A major selloff could make shares of world-class companies trade at big discounts. When that happens, you’ll want cash ready to take advantage of the buying opportunities.
We also suggest owning physical gold. Casey readers know gold is the ultimate safe-haven asset. It’s held its value for centuries, through every kind of financial crisis imaginable. Even a small amount of gold could help you avoid major losses during a stock market crash.
You may also want to short (bet against) companies likely to fall the hardest during a major selloff. Expensive stocks and companies struggling to make money are great short candidates. Louis James, editor of Casey Resource Investor, is shorting the S&P 500.
We also recommend watching this presentation we recently put together. The short video explains how to protect your money during a major financial crisis. Click here to watch.
• Moving along, Extraordinary Technology readers know Chris Wood is excited about self-driving cars…
Chris, Casey Research’s technology investing guru, expects the technology to eventually prevent hundreds of thousands of fatal car accidents per year. Self-driving cars could also reduce accident costs by $450 billion a year. Plus, self-driving cars could lighten traffic congestion and free up a couple hundred hours each year for the average commuter.
Two weeks ago, Elon Musk, co-founder and CEO of electric carmaker Tesla (TSLA), made a bold prediction about self-driving cars. Forbes reports:
“Within two years you’ll be able to summon your car from across the country,” Musk said on Sunday in a teleconference with the media, adding that “I might be slightly optimistic on that.”
He continued. “So, let’s say, if you’re in New York and your car is in Los Angeles, it will find its way to you,” he said, adding that your phone will communicate with the car and tell it where to find you…
• We asked Chris for his take on Musk’s bold statement…
Elon Musk is full of it.
The only way you’ll be able to summon your car from across the country within two years is if another human is driving it.
Chris says we still have a long way to go before self-driving cars are the norm.
There are a number of big hurdles to overcome before true self-driving cars become a reality.
There’s hacking, regulation, and numerous technological challenges, like the need for better cameras and sensors that work in all lighting and weather conditions. And the need for much more precise maps.
Plus, consider the software hurdle. Self-driving cars require sophisticated software to analyze the data collected by their GPS receivers, cameras, and sensors to make decisions about how to drive the car.
• There’s zero room for error when it comes to self-driving cars…
In a fully autonomous self-driving car, the software has to be perfect. It can’t be buggy. It can’t freeze or crash. After all, lives are at stake.
The problem is, that’s not how things work. All software occasionally freezes or crashes. Anyone who’s ever used a computer knows this. Even a small glitch in a self-driving car traveling at 70 miles per hour could be fatal.
• Chris has been researching the self-driving car industry for years…
Last month, Chris and his team dedicated an entire issue of Extraordinary Technology to the trend.
Chris explained the history of self-driving cars, the hurdles the industry faces, and the investing opportunities ahead. He even told readers about eight companies in the best position to profit from this technological revolution.
Chris doesn’t think you’ll see a fully self-driving car in the next lane within the next two years. However, the companies working on solving the problems unique to self-driving cars could make fortunes. And certain companies that make innovative parts for self-driving cars are positioned to make big profits well before self-driving cars go mainstream. Click here to learn more.
Chart of the Day
Wall Street expects this to be the worst earnings season since the Great Recession.
Today’s chart shows the quarterly earnings growth for S&P 500 companies. As we mentioned earlier, earnings for these companies fell 0.7% during the second quarter of 2015. They fell 1.5% during the third quarter.
Keep in mind, fourth-quarter earnings season just started. Only 6% of companies in the S&P 500 have shared results. But expectations aren’t good. According to FactSet, Wall Street expects earnings for S&P 500 companies to fall 5.7%. It would be the biggest drop in earnings since 2009.
We’ll update you as more earnings reports come in.
Delray Beach, Florida
January 20, 2016
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