Stocks fell on Thursday on disappointing earnings releases and stayed relatively flat early Friday as we "went to press."
Investors had high expectations amid projections that earnings could jump 20% for the S&P 500 from the year-ago levels following the U.S. tax reform, but Thursday was an ugly day for most companies that released earnings reports.
Thursday's earnings results confirmed corporate earnings peaked in the first quarter. Ebay fell 10.1% after it lowered its full-year sales forecast. Alcoa fell 6.4% after releasing its earnings. American Express fell 2.7% and Travelers lost 3.7%.
The FAANG companies plus Microsoft also retreated, with Netflix still falling sharply - down nearly $11 a share. Surprisingly, Alphabet (or Google - GOOG) wasn't off much since the EU announced a $5 billion antitrust fine against Google.
Investors will be closely monitoring the earnings of Facebook, Apple, Amazon, Google, and Microsoft for any signs of weakness in the second quarter and this chart illustrates why:
These five multimedia tech companies' combined capitalization of $4,095,058,706,432 is actually greater than the market cap of the bottom 282 companies of the S&P 500 at $4,092,769,755,136. When five or six companies in our country control that much of our economy, a great distortion occurs.
These five companies are worth nearly $4.1 trillion, equivalent to the fourth-largest economy in the world if you compare national GDPs. Year to date, these five companies have seen their market cap expand $812 billion. Because of the new tax laws, these corporations have been using their cash to "buy back" their shares.
Notice the massive difference in 2018 from 2017. Most of this buying is occurring in the big tech sector in extremely high valuations at the top of the economic cycle.
This is what is causing the market distortion. Take out this corporate buying from these companies and the U.S. would be declining with the rest of the global slowdown!
These are financially engineered profits with the real economy getting weaker. This is why Fed Chairman Powell acknowledged this past week that median real wages have been declining for the last three quarters.
You can't keep raising interest rates, mortgage rates, and rents while we're seeing soaring debt, higher gasoline prices, higher health care premiums, and now tariffs from all of our major trading partners, without creating a ticking time bomb.
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We also saw a rather mixed performance following the testimony of Fed Chairman Jerome Powell.
Not all is as well as we have been led to believe. Democrat Keith Ellison got Powell to actually acknowledge that median full-time wages have been declining for the previous three quarters!
Furthermore, Powell's testimony indicated that the Fed is uncertain just how the trade wars are going to affect the Fed's forecasts: "We don't know ultimately where this process will lead."
Some are now raising concerns that the Fed may be forced to end its quantitative tightening (QT) process by the end of the year rather than in 2020. The chief concern seems to be that the liquidity shortage in U.S. dollars is posing a destabilizing effect on emerging markets, where debt is off the charts.
Don't be surprised to suddenly get disappointing economic news given the fact that the spread is less than 25 basis points from inverting the yield curve.
On Wednesday, housing starts reportedly "declined 12.3%" month-over-month in June, while permits declined 2.2%.
Rising mortgage rates aren't the only problem here. Builders are having a hard time finding labor, combined with higher land and material costs. The key point about this report is that it reflects weakness when there should be strength!
Suddenly, the economy isn't looking all that hot. Oil prices have corrected about 6% this month but investors have been anticipating another bust-out earnings quarter.
We are learning they are about to be disappointed. In aggregate, companies are reporting earnings that are 2.1% above lowered estimates, which is BELOW the five-year average. Earnings will be good but not as good as last quarter.
I think we are going to find that corporate earnings actually peaked in the first quarter, that the surging dollar in the second quarter will have slowed earnings growth from the previous quarter, and that the third quarter will slow even more.
The trade wars will also impact corporate earnings, the strong dollar, and the vast majority of stocks. I think the January highs will likely still be the highs for the year.
The bulk of the growth in S&P 500 earnings in the first two quarters have come from one sector - Energy. It dwarfs all other sectors at 145.3% for the quarter.
When Trump came into office, a barrel of oil was approximately $44 and reached $75.27 early this month. This is a 71% increase in the price of oil.
This is where the S&P 500 growth has come from. It is oil-manipulated prosperity, not real economic growth. Remember, energy prices represent an expense for most companies.
Oil production is soaring. The state of Texas is about to surpass Iraq and Iran to become the world's number 3 oil powerhouse!
U.S. crude oil output is now hitting 11 million barrels a day, the most in history. We are swimming in oil, just as the weather cools into the second half of 2018.
To your wealth,
Dennis SlothowerEditor, Stealth Stocks Daily Alert and Wall Street's Underground Profits
Dennis Slothower has been leading a small but profitable group of investors to some extraordinary profits in both good markets and bad over the course of a 38+ year investment career, starting as a stock broker in 1979. In 2011 Dennis was named the top performer by Hulbert Financial Digest for avoiding the Crash of 2008. Now, he is bringing his extensive experience to the public through Outsider Club, Stealth Stocks Daily Alert, and Wall Street's Underground Profits. For more about Dennis, check out his editor page.