The last few weeks have gotten a little rocky for the S&P 500 with the index climbing 1% or so since July 15. That’s about the time that corporate earnings kicked into high gear. While the second quarter’s results have been on par with recent quarters, the slowing earnings growth outlook and other factors are starting to weigh on the market. The latest weekly data from FactSet shows that 80% of the S&P 500 companies that have issued earnings per share (EPS) guidance for the third quarter issued negative EPS guidance. While that percentage is essentially unchanged from the March quarter, it is well above the five-year average of 62%.
Taking a cue from history, investors don’t pay up for companies that are delivering slower earnings growth. Investors rather tend to dump those companies that have a more favorable growth to valuation tradeoff or rotate into companies whose business models are far more inelastic in nature. Examples of the latter include makers of non-discretionary items, such as paper products and healthcare, as well as sin or guilty pleasure stocks that produce alcohol, tobacco, chocolate and similar kinds of products.
In addition to the slower earnings growth outlook, there are other concerns weighing on the stock market and investors’ minds. One that is back on the table is whether or not the Federal Reserve will taper its efforts to stimulate the economy before too long. We can thank Richard Fisher, president of the Federal Reserve Bank of Dallas, for reviving that conversation when he reiterated late Thursday that the central bank probably will begin cutting back on its massive bond-buying stimulus next month, as long as economic data continues to improve. While the start of this week is slower than it has been in recent weeks, we will be getting a hefty slug of manufacturing and housing data later this week that will test Fed president Fisher’s comments.
The combination of slower earnings growth and renewed tapering concerns is starting to be seen in the fund flows. According to data from Bloomberg, investors pulled almost $1.20 billion from U.S. equity exchange-traded funds last week — a sharp reversal from the $32 billion of deposits that went into the funds in July. That July figure marked the highest level since September 2008. I don’t blame anyone for ringing the register — we’ve been doing that in PowerTrend Profits by trimming back strong performers like Facebook (FB) and others. Such a dramatic shift in fund flows, however, is another reason to be cautious.
We also have to contend with a seasonal factor that we run into each year right around this time. I’m talking about the few weeks of the summer that tend to be chock full of summer vacations. Despite how busy we will be here at PowerTrend Profits and ETF PowerTrader, I expect the world to come to a virtual standstill as people soak up the sun, frolic in the water and cook out with family and friends. Each year, we see a distinct drop in not only trading volume, but a thinning of people on trading desks and elsewhere.
The combination of the above factors has me more selective, if not flat out cautious. That said, I’m continuing to investigate companies and their shares that are poised to deliver big returns for my subscribers. Later this week, the September issue of PowerTrend Profits will be mailed. In that issue, I share a new pick poised to benefit from explosive growth ahead in the light emitting diode (LED) industry, as well as the next company to benefit from the intersection of the shift toward online solutions and federal mandates.
PowerTalk with Motorola Mobility on the new Moto X and adding U.S. jobs.
Joining me this week on PowerTalk to talk about the Moto X and Motorola’s re-shoring of jobs is Mark Randall, Motorola Mobility’s senior vice president of Supply Chain and Operations. One company that is looking to tackle both of these trends is Motorola Mobility, which is owned by Google. Not only did the two entities last week announce the Moto X — the first jointly developed smartphone between the two companies, but the device will be manufactured here in the United States.
During my PowerTalk with Mark, we talk about what it takes to make the Moto X such a highly customizable device and why domestic manufacturing can compete with China and other low-cost manufacturing alternatives. With a facility in Fort Worth, Texas, that spans more than 500,000 square feet, I suspect Motorola is just getting started with the Moto X, and that’s good for not only Google, but for American jobs.
To read my e-letter from last week, please click here. I also invite you to comment about my column in the space provided below.
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