America's largest companies are on track to report lower quarterly sales for the first time in three years, a broad and gloomy verdict on the health of the global economy.Belief in the Fed's ability to pull rabbits out of its hat is about the only thing this market has going for it, even though close scrutiny shows the Fed is not really in control of much of anything.
The drumbeat of weaker revenue is particularly troubling to investors looking for a read on the health of the global economy because it reflects underlying demand. Companies have a lot of levers to pull to improve profits: They can sell assets, buy back stock or cut costs. But it is hard to improve sales unless consumers and companies spend more of their money.
The earnings reports are providing a counterweight to optimism triggered by a string of improvements in U.S. retail sales and home sales, data that pointed to an end to the slump in the housing market and a recovery in consumer confidence.Several corporate chiefs said conditions worsened in the past month of the quarter and pointed to further weakness into next year. That means companies will be under pressure to cut costs and hold back spending to meet their profit targets, potentially putting a further drag on growth.
"I will tell you, one of the differences is it has been very rare that we've ever seen all of our major markets experiencing the impact of these kinds of global economies at the same time," McDonald's Chief Executive.
GE cut its forecast for revenue growth this year to 3%; three weeks ago it expected 5%. Chief Financial Officer Keith Sherin attributed the lower forecast to faster than expected downsizing of GE Capital.
Profit and revenues at the biggest U.S. companies have been expanding since the third quarter of 2009, a bright spot in what has been a lackluster recovery. But that run appears to be coming to an end this quarter. Growth in sales started decelerating in the second half of last year and ground to a near halt last quarter. Profits are expected to shrink by 1.8% for the third quarter, according to Thomson Reuters.
"You've got very slow global GDP growth," GE's Mr. Sherin said. (HOW ABOUT NO GROWTH, HOW ABOUT NEGATIVE GROWTH OR RECESSION, why can't the media and corporate bigwigs come out and say that perpetual growth is an impossibility so there have to be times of NO GROWTH or NEGATIVE GROWTH to balance things out?)
Stocks are priced beyond perfection, for growth that will not happen. When this matters no one knows, but it will matter.
Unless it's different this time (and it won't be), real returns in equities do not look good going forward.
Mike "Mish" Shedlock