Market Fear #3: Corporate Earnings
Click to Enlarge Heading into the Q4 earnings season, there was a big disconnect between overly optimistic analysts and investors and corporate executives desperate to roll back expectations. The negative-to-positive pre-announcement ratio of S&P 500 companies hit a record high, yet expectations wouldn’t budge.
As Q4 results have rolled out, major component after major component has been hit over the head with selling after disappointing results or gumming up earnings with non-GAAP “one-time” items to hide the truth: that historic levels of corporate profitability, fueled by cost cutting and share buybacks funded by cheap debt, is coming to an end.
This dose of reality is hitting bank stocks especially hard, since they’ve been the market leaders for so long thanks to an improvement in the housing market and the steady release of loan loss reserves straight to the bottom line of their income statements.
Now that higher interest rates are pinching the housing market, sucking the wind out of the bond market, and making loan loss reserve drawdowns look more and more ridiculous, shares are tumbling. Look at JPMorgan (JPM), which has entered its most severe downtrend since August.