Investor Confidence Plummets as Companies Post Weakest Revenue Quarter Since 2009
As we’re in the heart of corporate earnings season, the most striking thing to note is that many companies are posting weak revenue numbers. While they might be showing corporate earnings growth, this is coming on the back of cost cutting. While investor sentiment might be temporarily swayed by the appearance of strength through positive corporate earnings growth, one should look at the underlying situation to better extrapolate what is possible for future quarters.
Of the 119 S&P 500 companies that have reported corporate earnings, sales rose an average of 2.9% for the quarter. This is the weakest quarter since the third quarter of 2009. While 73.0% of reported companies have beaten corporate earnings estimates, only 42.0% have exceeded revenue guidance. Investor sentiment might pay attention to the corporate earnings, but I would suggest that at some point, this trend will end unless revenue also begins to increase. There are only so many ways to increase productivity before the options become exhausted.
This lack of revenue growth will feed into the economy with less spending on hiring and capital expenditures. Investor sentiment might be held off for a little while, but people would be foolish if they didn’t realize that, eventually, revenue needs to start growing again.
In addition to the global economic slowdown, part of the frustration is the lack of confidence in regards to the fiscal cliff. If companies knew that massive program cuts weren’t coming down the pipeline, they might be willing to start investing and spending again. This fear is also growing in investor sentiment, as we’re seeing firms that are sensitive to government contracts have begun selling off over the past couple of months. This possible hit to corporate earnings is hitting investor confidence before it even happens, how bad will it get once the cuts become enacted?
An example of lowered future expectations is Texas Instruments Incorporated (NASDAQ/TXN). The company lowered revenue guidance for future quarters due to its customers becoming cautious over the uncertainty of the global economy. This is leading to a weaker investor confidence profile, as the shares continue the sell-off that began a few months ago. Regardless of how such firms can massage corporate earnings numbers over the short term, if revenue is going to stall, then investor confidence will fade as well.
Chart courtesy of www.StockCharts.com.
It is clear from the chart that investor confidence has been on the decline for quite some time. As the stock has continued to sink through each successive support area, it becomes quite dangerous to try and attempt picking a bottom. Waiting for some news of an improvement in revenue, in addition to corporate earnings, would be a safe way to trade this stock. The truth is that this lack of investor confidence could last for many months. I would be quite cautious, because if revenue doesn’t improve and cost cutting has already accomplished a lot, then the only thing left for a decline would be the corporate earnings. That’s not the kind of trade I’m willing to make. Wait for some investor confidence to come in before dipping your toe into the water.