There is no credible argument anymore that the U.S. economic recovery is intact and only running into a brief slow patch. And a significantly weaker economy cannot support current earnings forecasts. Those are appalling conditions for an overbought stock market.

Wall Street has yet to begin downgrading its S&P 500 earnings forecasts, and probably won’t begin to any degree until its unavoidable, a couple of weeks before 2nd quarter earnings reports begin coming out.

But corporations are not waiting.

Already warnings that sales and earnings will be worse than currently expected have been issued by some of the world’s largest technology companies, including Cisco Systems (CSCO), Hewlett-Packard (HPQ), Logitech (LOGI), Nokia (NOK), Research in Motion (RIM), and Sony (SON); and major retailers including Home Depot (HD), WalMart (WMT), Sears (SHLD), The Gap (GAP), and Aeropostale (ARO).

And no wonder.

The merry month of May was anything but, with its reports of deteriorating conditions in April that were much worse than forecasts, as measured by the ISM Mfg Index, the ISM Non-Mfg Index, Factory Activity, and Industrial Production. There was the first drop to a negative reading by the Leading Economic Indicators in 9 months, the largest decline in Durable Goods Orders since last August, big plunges in new home starts and permits for future starts. There were big declines in existing home sales (now down 12.9% YTD), and home prices, while consumer spending rose in April by the smallest amount in 3 months.

Those reports were for April, the first month of the 2nd quarter. Now the reports for May are coming in, and are even worse.

In the last week or so it has been that the Empire State (NY area) Mfg Index, the Philadelphia Fed Index, and the Dallas (Texas area) Fed Index, plunged dramatically in May. Pending Home Sales unexpectedly fell 11.6% in April, to a 7 month low, a negative for actual sales in May and June.

This week it has been the Case-Shiller Home Price Index, which showed home prices fell again in March. In addition, the Chicago PMI Index dropped sharply, to 56.6 in May from 67.6 in April, Consumer Confidence unexpectedly fell from 66 in April to a six-month low of 60.8 in May.

And now we have the ISM Mfg Index shocking economists again by declining to its lowest level in 20 months, falling to just 53.5 in May from 60.4 in April, and the ADP jobs report showing that only 38,000 new private sector jobs were created in May, down from 177,000 in April, and in sharp contrast to the consensus forecast that 180,000 new private sector jobs were created.

A significantly weaker economy cannot support Wall Street’s current earnings forecasts, and since those super optimistic earnings forecasts have been the main support for the stock market, look out below as the market begins anticipating the downgrade of earnings estimates.

The market’s unfavorable season has just begun.

Sy Harding is president of Asset Management Research Corp, publishers of the financial website www.StreetSmartReport.com, and the free daily market blog, www.SyHardingblog.com.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Only logged in users are allowed to post comments. Register/ Log in

The Market Oracle is a FREE Financial Markets Forecasting & Analysis web-site.
(c) 2005-2024 MarketOracle.co.uk (Market Oracle Ltd) - Market Oracle Ltd asserts copyright on all articles authored by our editorial team and all comments posted. Any and all information provided within the web-site, is for general information purposes only and Market Oracle Ltd do not warrant the accuracy, timeliness or suitability of any information provided on this site. nor is or shall be deemed to constitute, financial or any other advice or recommendation by us. and are also not meant to be investment advice or solicitation or recommendation to establish market positions. We do not give investment advice and our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to enter into a market position either stock, option, futures contract, bonds, commodity or any other financial instrument at any time. We recommend that independent professional advice is obtained before you make any investment or trading decisions. By using this site you agree to this sites Terms of Use. From time to time we promote or endorse certain products / services that we believe are worthy of your time and attention. In return for that endorsement and only in the cases where you purchase directly though us may we be compensated by the producers of those products.