More horrendous news from companies like Crocs (CROX), Costco (COST), and Toyota, and more banks going belly up (two small ones on Friday), so it’s time for an update on the economy at large. Bulls love to say that, outside of a couple of problem areas, the economy’s doing great. Unfortunately, this is no longer true.
With half of the S&P 500 having reported Q2 results, here’s where things stand (from WSJ):
- Earnings down 17.9% year-over-year. This is worse than the 17.1% fall in Q1 and way worse than the 11.5% consensus.
- Earnings excluding financials (lousy) and energy (excellent), earnings up a paltry 2.8%. This is down from 9.7% in Q4, but actually up modestly from Q1).
- Earnings excluding financials, energy, home-builders, and car makers up a crappy 5.4%, compared to 11.3% in Q4 (and again up modestly from Q1).
It’s the 18% total drop that matters. Soaring energy profits aren’t offsetting the collapse in financials. Given that most financial firms are still frantically trying to avoid going out of business, moreover, those profits aren’t coming back anytime soon.
After years of record profit margins, S&P 500 profit margins are rapidly regressing to (and probably beyond) their long-term mean. When measured against this mean, the stock market is still expensive. Which is why we expect it has further to fall.
See Also: Stocks Crash But Still Aren’t Cheap