On January 19, Joe and I lowered our outlook for earnings and for the S&P 500. We have to do so again. We first started cutting our forecasts during September 2014 and again at the beginning of last year. The problem is that the price of oil continues to fall and the dollar is still soaring. The global economy continues to weaken, and all these developments clearly are weighing on U.S. economic growth.
Industry analysts are also cutting their earnings outlook. That’s not unusual because they have a tendency to be too optimistic. However, with earnings growth coming in negative on a year-over-year basis for Q4-2015, they are now projecting another decline during Q1-2016. We are lowering our 2016 estimate by $2 to $122 per share. That’s a growth rate of 3%, down from our previous estimate of 5%. We are sticking with 5% in 2017, which yields an estimate of $128 — also $2 lower than our previous forecast.
Last year, the S&P 500 fell by 0.7% to close at 2043.94. We lowered our target for this year from 2300 to 2150 on January 19. Now it looks like another relatively flat year, let’s say at 2000. Joe and I still view all this as a consolidation phase in a secular bull market that should resume in 2017, with our target remaining at 2300 for next year.
The S&P 500 is currently 6.9% below last year’s close. It has been trading in a very volatile range since April 2014 between roughly 1862 and 2130. It likely will remain a very choppy range-bound market this year, in our opinion. One of our accounts has taken some solace in that outlook, concluding, “So it should be a stock picker’s market.” I concur. Picking the right stocks will be this year’s challenge.
The problem last year and this year is that bad news is no longer good news. It was good news when central banks responded to the bad news by providing more monetary stimulus. But that game seems to be coming to an end, as investors increasingly believe that central banks have run out of ammo and are doing the best they can with fairy dust.
Consider the following:
(1) Downside of negative interest rates.
On Friday, January 29, on the BOJ unexpectedly lowered the official rate on new bank reserve deposits below zero to -0.1%. That’s after BOJ Governor Haruhiko Kuroda emphatically ruled out negative interest rates on January 21: “We are not considering a cut in interest on bank reserves,” he told parliament. The BOJ feared that negative rates would make banks reluctant to sell their Japanese government bonds (JGBs), thus undermining its asset purchase program. Kuroda seems to like surprising the markets with his moves. However, this latest one seems like an act of desperation and an implicit admission that all his monetary easing since late 2012 hasn’t worked to revive economic growth and inflation.
The ECB first cut its rate on all bank reserve deposits on June 11, 2014, lowering it to -0.10%. The Eurozone’s central bank cut the rate again to -0.20% on September 10, 2014 and most recently to -0.30% on December 3, 2015.
Yet at his 1/21 press conference, ECB President Mario Draghi said:
“Yet, as we start the New Year, downside risks have increased again amid heightened uncertainty about emerging market economies’ growth prospects, volatility in financial and commodity markets, and geopolitical risks. In this environment, euro area inflation dynamics also continue to be weaker than expected. It will therefore be necessary to review and possibly reconsider our monetary policy stance at our next meeting in early March, when the new staff macroeconomic projections become available which will also cover the year 2018.”
In other words, he too was implicitly admitting that the ultra-easy monetary policies of his and the other major central banks haven’t solved the problems of weak growth and low inflation plaguing the Eurozone and the world economies.
(2) Fischer has second thoughts.
Debbie and I aren’t surprised that Fed Vice Chairman Stanley Fischer is changing his tune about the outlook for monetary policy. Last month, he was quite hawkish, telling CNBC that the Fed thought the market expectations, at the time, for two rate hikes this year “are too low.” He said the Fed’s own forecast of three to four rate hikes in 2016 is “in the ballpark.” On Monday, he said that Fed officials now are worried that the global market selloff (which was partly triggered by his remarks!) could sap the strength of the US economy, suggesting that the market’s expectations of barely any interest-rate hikes this year could turn out to be right.
Referring to his January statement, Fischer said during a question-and-answer session: “When somebody said ‘in the ballpark,’ he meant it is among the numbers that are being talked about. He did not mean it is the only number that is being talked about.”
In his prepared speech, Fischer said, “At this point, it is difficult to judge the likely implications of this volatility. If these developments lead to a persistent tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the United States.”
(3) Awash in oil.
On December 2, 2014, I wrote: “We are witnessing the Clash of the Titans in the global oil industry. Saudi Arabia has abdicated its role as the Federal Reserve of the oil market. The Saudis are no longer willing to conduct ‘open market operations’ in the oil market to stabilize the price on behalf of OPEC’s oil cartel. They’ve decided to let the market determine the price. They clearly hope that it will fall low enough to shut down lots of U.S. oil production, and then bounce back. How do you say: ‘Good luck with that’ in Arabic?”
At the end of last year, I wrote, “A cartel that can’t control the production of its members isn’t a cartel. The notion that OPEC can cut the production of non-cartel members by flooding the market with more oil and depressing prices is a sign of desperation rather than a strategy.”
The price of oil has been struggling to find a bottom recently. It has rallied on rumors of the possibility of OPEC and Russian output cuts. But the rallies are aborted by bearish news on the supply side. The latest data compiled by Oil Market Intelligence show that supply continues to increase despite the plunge in oil prices.
Over the 12 months through December, OPEC’s output rose to a record high of 38.1mbd, while non-OPEC output rose to a record high of 56.7mbd. During December, production in the US and Canada rose to a new record high of 13.4mbd, well exceeding Saudi output of 10.1mbd. The Saudis have been replaced as the swing producers by frackers in the US, and so far they are still pumping. US crude oil inventories rose to a record 494 million barrels in late January, almost 100 million more than a year ago.
Needless to say, this has been a disaster for the revenues and earnings of oil producers. Total world crude oil revenues have plunged $2.4 trillion from the June 2014 high of $3.8 trillion (annualized) to $1.4 trillion in December of last year. The forward earnings of the S&P 500’s Energy sector has fallen over the same cliff, plunging 74.7% from $50.30 per share in July 2014 to $12.73 currently.
(4) Earnings estimates sinking.
Of course, the forward earnings of the S&P 500 Materials sector has also been depressed by the bursting of the commodity super-cycle bubble. The forward earnings of the S&P 500 Industrials has been flattened, weighed down by weakness in the Construction Machinery industry, and even in Railroads.
Overall S&P 500 forward earnings has declined for the past three weeks by 1.8%. Currently, the blended actual/estimate for Q4-2015 earnings shows a decline of 4.3% y/y, using Thomson Reuters data. That’s after virtually no growth during the previous two quarters. Energy has weighed heavily on earnings.
Now it seems that the strong dollar was also a big drag at the end of last year. It is expected to continue to be so as industry analysts now expect earnings to decline 2.7% y/y during Q1-2016.
Dr. Ed Yardeni
is the President of Yardeni Research, Inc., a provider of independent global investment strategy research. To read more of his blogs, CLICK HERE NOW.
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