Stock market soon will confront a slowdown in company profits
NEW YORK — Tumult in China triggered the worst opening week for U.S. stocks in history, and this week investors could get plenty more to worry about.
Profits are expected to drop at U.S. companies. Again.
Earnings for companies in the Standard and Poor’s 500 index are forecast to drop for the second straight quarter, a rare occurrence outside a recession. Despite a rebounding jobs market, the U.S. did not grow fast enough to boost profits, and once surging developing economies that helped lift foreign sales slowed dramatically.
All this would be worrisome enough at any time, but investors are particularly jittery now. U.S. stocks are expensive by some measures, even after slipping in 2015 and falling sharply in the first week of the year. On Monday, the Dow Jones industrial average and the S&P 500 mounted a last-minute comeback to close slightly higher, snapping a threeday losing streak.
But that still leaves little room for more disappointing news. Companies began reporting their results for the October-December quarter on Monday. Earnings per share for the companies in S&P 500 is expected to have dropped 5.5 percent compared to a year earlier, according to S&P Capital IQ, a research firm. That follows a 1.4 percent drop in the July-September quarter. Revenue is forecast to fall for a fourth quarter in row.
This wasn’t supposed to happen. A year ago the average view of analysts who follow the stock market said earnings for the October-December quarter would jump 12 percent.
Analysts on Wall Street are a notoriously bullish bunch, but you can almost understand their enthusiasm. Since the financial crisis, U.S. companies have managed to squeeze profits out of a slow-growing domestic economy. They slashed costs, often through massive layoffs, and restructured their businesses to operate faster and smarter.
They were also helped by surging sales abroad and super-low borrowing rates, thanks to Federal Reserve policy. Plus, many companies bought trillions of dollars of their own shares to take them off the market. Investors love the maneuver, because it spreads earnings over fewer shares and boosts earnings per share. But critics point out that the purchases can make companies seem more successful than they actually are.
The result was a booming stock market. Even after last week’s drop, its biggest since September 2011, the index is just 6.5 percent below its May peak.
The problem now is that it is difficult for Corporate America to cut costs any more, and the rest of the world is slowing and can’t help out. The good news is that some parts of the U.S. economy are doing well. U.S. households have cut debt. The housing market is solid. And there are more jobs.