Energy slump isn't the bulls' only problem: "Everyone is seeing the cloud vs. the silver lining"
Stocks fell Monday amid rising concern about falling earnings. The S&P 500 and Nasdaq were each down 0.5% in recent trading.
Fourth-quarter earnings season kicks off Monday with Alcoa's release, followed by results later in the week from CSX, Intel, Schlumberger and financial giants such as JPMorgan, Citigroup, Goldman Sachs, Bank of America and Wells Fargo. S&P 500 earnings are expected to rise 1.1% for the fourth quarter, which would be the slowest pace since the third quarter of 2012, The WSJ reports, citing data from FactSet.
Presuming the market is forward looking, sluggish fourth-quarter earnings were "priced into" during the market's mid-September to mid-October swoon. More troubling for the bulls, estimates for first-quarter profits have fallen 6.4 percentage points in the past three months, Bloomberg reports, the biggest drop since 2009.
Excluding energy, where profits are expected to slump 19% in the fourth-quarter, S&P 500 earnings are expected to rise 3.6% in the fourth quarter.
"This happened so suddenly, the crash in oil prices, revisions haven't really caught down to what stock prices have done and maybe what the reality is," Yahoo Finance senior columnist Michael Santoli says in the accompanying video. "I do think that's going to have an outsized impact here, and now we're talking about the ripple effects of oil."
One of those 'ripple effects' is the decline in capital expenditures in the energy sector, which is by far the biggest contributor to U.S. capEx -- as much as 35% according to Deutsche Bank. A revival of capEx spending was one of the lynchpins of the bull case in late 2014 and heading into 2015.
But this is not "just" about the energy sector; industrial companies are expected to cut capEx by 15% in 2015, the first drop since 2009, according to Bloomberg. Furthermore, the 3.6% earnings growth "ex-energy" forecast for the fourth quarter is well below the 5.2% average rate for the past eight quarters, The WSJ reports.
As Santoli and I discuss in the accompanying video, financial services companies are being hurt by the flattening of the yield curve -- in addition to the decline in energy-related investment banking activity. "Financials have tremendous headwinds in terms of rates, that's not going to be a leadership group to say the least," he says. "Everyone is seeing the cloud vs. the silver lining right now."
In addition, U.S. multinationals generally and the tech sector specifically are exposed to the strength in the dollar, which makes them less-competitive vs. international rivals.
Take out energy, financials and technology, and that's nearly 45% of the S&P 500. Beyond healthcare (14.2%) and it seems like the whole bull market is hanging on the U.S. consumer. Consumer discretionary stocks (12.1%) have fared well, thanks in large part to falling oil and gas prices. But Friday's jobs report showed that wage growth remains elusive and so it's hard to imagine cash-strapped, debt-laden Americans going on a buying binge anytime soon.
The utility sector remains one bright spot for investors, with no reduction in first-quarter earnings estimates, according to Bloomberg. But utilities have just a 3.2% weighting in the S&P 500 and "I along with everybody else thinks it's way too much to be paying for utility stocks and REITs because they're just yield plays," Santoli says.
Beyond earnings and earnings momentum, Santoli says the best thing U.S. large-cap stocks may have going for them is they look good "relative to everything else." But being the "one thing left standing" isn't necessarily a positive if the foundation on which stocks stand, i.e. earnings, starts to get shaky.
Aaron Task is Editor-in-Chief of Yahoo Finance. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com.
