Weak Earnings Send Investors Fleeing

A trader works on the floor of the New York Stock Exchange Photograph by Andrew Burton/Getty Images

How much of this bull market run is actually about earnings? And how much comes down to investors being smoked out of nil-yielding bonds and cash and into riskier assets, corporate income statements be damned?

This last week of October is taking a crack at answering that cosmic query. Companies in the Standard & Poor’s 500-stock index are slated to report lower earnings for the first time in three years, with a clutch of blue chips, including McDonald’s and DuPont, already disappointing. Of the 145 index members to have reported, 60 percent have so far missed analysts’ revenue estimates, according to Bloomberg data.

Meanwhile, the presidential election could go either way, and we could all go gliding down the fiscal cliff if Washington doesn’t act before Thanksgiving’s tryptophan kicks in. Corporate tech spending remains stingy. Not that any of this has prompted a 25th anniversary reenactment of the Crash of ’87, mind you; the S&P 500 is still up 12 percent year to date. And aggregate S&P 500 earnings are still on track to set an all-time record. That’s no small feat for an economy and market that had truly collapsed four short years ago.

Still, markets were down significantly across the board Tuesday, consistent with the downtrend of the past few days. DuPont fell after cutting its forecast on declining demand for paint pigment and solar cells. 3M, for its part, cut its 2012 earnings forecast. “The market, it’s just looking for things to react to,” says Joshua Scheinker, a broker with Scheinker Investment Partners in Baltimore. “It’s trading on every earnings report, every euro falter, every political snippet, and Apple. Seems like fundamentals are out the door.”

Scheinker has been telling clients that tax selling by mutual funds is probably exacerbating the recent downtrend. Citigroup strategist Tobias Levkovich also faults a paucity of the kinds of promising headlines that propelled the market to near-record levels earlier this year. “With a fair amount of good news now behind markets—the Fed’s latest [quantitative easing], the German court decision on [the European Stability Mechanism], and the pro-Europe Dutch elections—near-term upside catalysts for the market may be wanting.”

One support for stock prices that remains in place: paltry yields on fixed-income investments as the Federal Reserve vows to keep interest rates at low levels until at least 2015. Last week, yields on junk debt (rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s) fell to an unprecedented 6.843 percent, according to the Bank of America Merrill Lynch U.S. High Yield Master II index. As lower yields limit bonds’ appeal, stocks seem like an increasingly attractive alternative.