US profits are falling fast - will stocks follow?
Profits at American companies are deteriorating at a 'ferocious pace' – and it's only going to get worse. So why are stocks still so expensive?
In this week's editor's letter (available here for subscribers) I mentioned the fall in earnings forecasts in the US.
A note from Albert Edwards at Socit Gnrale picks up the point today. The profits deterioration in the US and indeed elsewhere, says Edwards, is going at a "ferocious pace". According to Thomson Reuters, "negative US company pre-announcements going into the third quarter are now running at their fastest pace since Q3 2001". Forecasts have now fallen around 15% in the last year, and are being sliced at around 2% a month.
There's nothing new in forecast downgrades analysts are institutionally optimistic. They start the year with their rose tinted glasses firmly on, and then over the rest of the year slide them off as they "scramble back into the real world".
However, there is something new, notes Edwards, in the fact that we are seeing so much downgrading already this year. Usually it is the September to April period that seen analysts forced to slash and burn their forecasts. That makes an almost 2% downgrade in August both rare and "very serious indeed".
Given that new capital goods orders are falling fast and have been falling for four months, it is also a trend that is likely to accelerate. And that's before the US joins the rest of the world in "biting the fiscal bullet".
Need more evidence? What about yesterday's news from Fedex? It is now forecasting its first quarterly decline in earnings since 2009 thanks to a fall in demand for the express packages that provide most of its sales. In the US, express volumes fell by 5% year-on-year. At the same time, the average volume for international priority packages fell 3% year-on-year.
All this might make investors in the US feel a little nervous after all, if earnings aren't growing, what justification is there for the stock market being as expensive as it is? Note that the US market is on a cyclically adjusted price/earnings ratio of around 20 times, that France is on about 12 times (as is the UK), and that the world's cheapest market - Greece- is on a CAPE of just under two times.