TRADER ALERT: People Are Too Optimistic, A Massive Downward Earnings Revisions Is Coming, And Stocks Could Easily Drop 20%
October 26th, 2012
Marc Faber: Stocks could plummet 20%
Marc Faber, editor and publisher of the Gloom Boom & Doom Report, sees a 20% decline ahead for the Dow and S&P 500 from their recent highs. Here’s what a 20% decline in the S&P 500 ($SPX) would look like. He was featured on CNBC in Europe on 10/23/2012.
Downward Earnings Revisions Are A Game-Change For The Stock Market
In the face of a world-wide slowdown, the European sovereign debt crisis, dysfunction in Washington and the fiscal cliff, two major props have been behind the upward move of the market—-the vigorous gains in corporate earnings and the Fed’s determination to keep monetary policy ultra-easy into mid-2015. Now one of these bulwarks—-earnings—– are in the process of reversing to the downside, leaving only the Fed to stem the tide against the force of household debt deleveraging.
For those companies reporting 3rd quarter results, earnings were down an average of 3.9% and revenues up only 0.4%. Moreover, results for the 4th quarter may be even worse. Of 39 S&P 500 companies providing 4th quarter guidance, 35 indicated results below the current consensus while 25 of 28 forecast that revenues, too, would fall short of the consensus.
Companies cutting 4th quarter estimates included Caterpillar, 3M, DuPont, Texas Instruments, United Technologies, Advance Micro Devices, Microsoft, IBM and Intel. Consensus estimates for the 4th quarter now look for a year-over-year earnings increase of 8.3% and a revenue increase of 2.7%. With the current round of downward revisions, and probably even more ahead, these estimates are sure to come down. In addition the global slowdown makes it highly likely that 2013 earnings estimates are too high as well, indicating that P/E ratios are significantly higher than the “Street” believes.