Corporate Profits Head South

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Includes: DIA, QQQ, SPY
by: Hale Stewart

By New Deal democrat

At long last, the BEA has released corporate profits for Q4 2015. Here's the bad news:

Corporate profits are a long leading indicator, and they have now turned negative for the second quarter in a row. Usually proprietors' income (blue in the graph below), reported much more timely, tracks their direction well, but sometimes corporate profits (red) turn first - and in the 4th Quarter, that's what happened:

I'll be updating my look at all of the long leading indicators next week. Stay tuned ....

Note from Bonddad: this has been one of my biggest issues with the market for the last 6-12 months. Both Zacks and Factset.com have documented a deteriorating revenue and earnings picture. Just last week, I made the following observation in my weekly market commentary:

Market Outlook: the market is still expensive. The current and forward PE for the SPYs and QQQs is 23.61/21.45 and 17.05/18.09, respectively. The revenue and earnings picture is weak. From FactSet:

The estimated revenue decline for Q1 2016 is -0.8%. If this is the final sales decline for the quarter, it will mark the first time the index has seen five consecutive quarters of year-over-year declines in sales since FactSet began tracking the data in Q3 2008. Five sectors are projected to report year-over-year growth in revenues, led by the Telecom Services and Health Care sectors. Five sectors are predicted to report a year-over-year decline in revenues, led by the Energy and Materials sectors......

The estimated earnings decline for Q1 2016 is -8.4%. If this is the final earnings decline for the quarter, it will mark the first time the index has seen four consecutive quarters of year-over-year declines in earnings since Q4 2008 through Q3 2009. It will also mark the largest year-over-year decline in earnings since Q3 2009 (-15.7%). Only three sectors are projected to report year-over-year growth in earnings, led by the Telecom Services and Consumer Discretionary sectors. Seven sectors are projected to report a year-over-year decline in earnings, led by the Energy, Materials, and Industrials sectors.

To reiterate: we're potentially looking at 5 consecutive quarters of revenue declines and four consecutive quarters of earnings declines. These are bear market statistics. And they go a long way to explaining why I continue to be slightly bearish regarding the markets.