Is This An Early Warning Sign Of A Stock Market Collapse?

Includes: DIA, IWM, QQQ, SPY
by: Lou Basenese

A segment of our readership at Wall Street Daily routinely bludgeons me for being overly optimistic. Heck, I think some want to sue me for being a "glass half-full" kind of guy. (The gall!)

Well, today, I'll leave them no such room for criticism.

Plain and simple, if the earnings numbers coming from corporate America don't improve, this bull market is in serious trouble.

Survey Says? It's All About Earnings!

Every spring and fall, Barron's conducts its Big Money Poll of institutional investors. The latest edition came out this weekend. And in response to the question, "What would send stocks sharply higher in the coming months?" - 135 managers all agreed that it's "corporate earnings."

Why bring it up?

Because I know that not all of our readers believe me when I repeatedly say that stock prices ultimately follow earnings. Don't doubt me anymore!

As Barron's latest poll proves, even the most successful money managers on Wall Street realize that the continuation of this bull market is all about earnings.

With that in mind, two weeks ago I shared two key metrics to track this earnings season - the earnings "beat rate" and revenue beat rate. I also promised to provide any urgent developments. And this is urgent…

Early Results Aren't Pretty

Although it's still way early in the reporting season, the numbers are anything but encouraging. Or as Bespoke Investment Group put it, "Bottom-line average, top-line bad."

Based on roughly 200 company reports so far, the earnings beat rate stands at 58%. That's right in line with last quarter. But it's well below the highs hit during this bull market. Check it out…

It's not pretty. Things get downright ugly, though, when we turn our attention to the revenue beat rate. It currently checks in at 43.9%. To put that into perspective, if the earnings reporting season ended today, that would be the worst reading since the financial crisis hit.

Since Bespoke's calculations take into account the results of all publicly traded companies on major exchanges, we could simply downplay the findings as too inclusive.

The problem is, when narrowing our analysis to simply S&P 500 companies, the same trend holds true…

According to the latest FactSet Earnings Insight report:

  • 72% of the 102 companies in the S&P 500 Index that have reported results beat earnings estimates. That's slightly above the average beat rate of 70% over the last four quarters.
  • However, only 45% beat revenue estimates - falling short of the average beat rate of 52% over the last four quarters.

So either way you slice it, the latest earnings season stats hardly inspire confidence.

Just about the only positive thing I can say (I am the "glass half-full" guy, right?) is that current stock valuations suggest some bad news might already be baked into prices. The S&P 500 Index currently trades at 13.5 times forward earnings, which is below the 10-year average of 14.2.

Bottom line: It's still early. And it's not uncommon for the beat rates to improve as the earnings season unfolds. Nevertheless, the current readings are definitely a cause for concern. In fact, if this bull is going to charge definitively higher, the beat rates need to improve. This week!

Why the urgency? Because over 700 companies are expected to report results by Friday. If the rates don't improve by then, it'll become increasingly difficult to do so, statistically speaking.