Corporate America is doing whatever it can to prop up the stock market.
As you've probably noticed, U.S. stocks are rallying. Yesterday, the S&P 500, Dow Jones Industrial Average, and NASDAQ all hit new all-time highs.
You might find it odd that stocks have broken out to record highs. After all, the global economy is clearly headed in the wrong direction. Stocks are expensive. And Corporate America is struggling to make money.
As of Friday, 91% of the companies in the S&P 500 have shared second-quarter financial results. Based on these numbers, second-quarter earnings for the S&P 500 are on track to decline 3.5% from last year. This would mark the fifth straight quarter of falling earnings. That hasn’t happened since the 2008–2009 financial crisis.
Still, many in the mainstream media are saying corporate earnings aren’t that bad.
Today, we’ll show you what some analysts call the “silver lining” of this ugly earnings season. As you’ll see, it’s no reason to be excited about stocks. If anything, it’s more proof that stocks are very dangerous right now.
• Second-quarter earnings season is almost in the books…
Earnings season is when companies let the world know how business is going. Management tells investors if earnings grew or shrank during the previous quarter.
A good earnings season can push stocks higher. A bad one can drag stocks lower.
By most measures, the second-quarter earnings season has been awful. Yet, stocks are rallying. That’s partly because earnings didn’t fall as much as Wall Street expected.
As recently as June 30, analysts projected second-quarter earnings to fall 5.5%. With earnings down just 3.5%, there have been many positive “earnings surprises”…
• As of Friday, 70% of the companies in the S&P 500 have beat their consensus estimate…
Before earnings reports come out, stock analysts issue earnings estimates. They say what they think earnings will come in at, often down to the penny.
Research firms take the average of these estimates to get a “consensus earnings estimate.”
If a company beats the consensus estimate, that’s known as an “earnings surprise.” This will usually lift a company’s stock. If earnings fall short of the consensus estimate, a company’s stock will usually fall.
So, while second-quarter results have been bad, they haven’t been as bad as Wall Street expected.
But there’s a problem…
• Corporate America is staging earnings surprises…
According to The Wall Street Journal, some of America’s biggest companies are nudging analysts to lower their earnings estimates. This has made it easier for companies to “beat earnings.”
To see why this is a problem, you have to understand how we get earnings estimates.
To accurately estimate earnings, an analyst has to know a company inside and out. He has to know how it makes money…where it spends money…and the ins and outs of its industry.
Needless to say, it’s not an easy job. That’s why many analysts speak directly with corporate management to help them better understand the business.
Companies can have private conversations with analysts. They just can’t reveal any material information that’s not public.
This is where it gets tricky…
According to The Wall Street Journal, companies can “gently push analysts in helpful directions.” For instance, a CEO might say one of its business segments is starting to “feel the pinch.”
Any analyst who hears this is going to lower his earnings estimate, making it easier for that company to beat earnings.
• This shady practice has become commonplace…
The Wall Street Journal reported two weeks ago:
Nearly 2,000 times from the start of 2013 through this year’s first quarter, companies would have missed the average earnings estimate if analysts hadn’t changed their numbers in the 40 trading days before the company’s quarterly earnings report…
Even some of America’s most iconic companies appear to be getting in on the act:
Lowered earnings forecasts helped 66 companies, including Citigroup Inc., Coca-Cola Co. and Viacom Inc., each meet or exceed earnings expectations during at least three of 13 quarters examined by the Journal. CBS Corp., U.S. Bancorp and seven other companies met or beat reduced estimates in about half the quarters.
• If a company doesn’t beat earnings, its stock can fall…
The Wall Street Journal explains:
The stakes are high. In the past five years, the share price of companies in the S&P 500 that fell short of analysts’ average earnings estimate dropped 2.2% on average in the two days before and after reporting quarterly results, according to FactSet.
Right now, it’s especially important that companies beat their earnings estimates.
Remember, the S&P 500 is on track to post its fifth straight quarter of falling earnings. And sales for companies in the S&P 500 are on track to fall for six consecutive quarters.
For a lot of companies, an earnings surprise is about the only good news they can deliver.
• You have to wonder how long “earnings surprises” can keep stocks afloat…
According to FactSet, Wall Street expects third-quarter earnings to drop 2.0%. The third quarter ends on September 30. As recently as March 31, analysts projected third-quarter earnings to rise 3.3%.
We’re not sure why third-quarter profit expectations are rapidly deteriorating. It could be because companies are talking down earnings. Or maybe Wall Street is starting to see what we’ve been warning about for months: the global economy is headed for a long and painful downturn.
• We encourage you to own gold for protection…
As we often say, gold is real money. It’s preserved wealth for centuries because it’s unlike any other asset. It’s durable, easy to transport, and easily divisible.
It’s also the ultimate safe haven asset. Investors buy it when they’re nervous about stocks or the economy.
This year, gold is up 28%. It’s beat stocks 6-to-1.
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Chart of the Day
Earnings keep falling, stocks keep rising.
Today’s chart shows the S&P 500 versus the earnings per share (EPS) for companies in the S&P 500. You can see corporate earnings have been falling since 2014. Normally, a severe earnings drought like this would cause stocks to fall. But the S&P 500 just hit a new all-time high.
E.B. Tucker, editor of The Casey Report, says this can’t go on forever:
Stocks are becoming increasingly more expensive compared to other investments.
A rising stock market typically precedes better business conditions for companies. It means more sales and more profits on the horizon.
We don’t see that this time around.
E.B. may be bearish on the broad stock market but he’s not avoiding all stocks. He’s only investing in companies that can make money no matter what happens to the economy.
This strategy has paid off for readers of The Casey Report. One of E.B.’s stock picks has gained 70% since March. Another has soared 105% since April. E.B.’s latest stock pick has skyrocketed 45% since last Thursday…but it could go much higher. According to E.B., this stock could quadruple over the next few quarters.
You can invest alongside E.B. by signing up for a risk-free trial of The Casey Report. If you act today, you can access The Casey Report for just $49 a year. Watch this short presentation to lock in this special price.
Frankly, this is one of the best deals you’ll come across in our industry. E.B.’s portfolio has returned 28% this year. He’s beaten the S&P 500 by more than 4-to-1. More importantly, Casey Report readers are set up to make big gains even if the economy runs into serious problems.
That’s never been more important. To learn why, watch this FREE video.
Delray Beach, Florida
August 16, 2016
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