Aug 27, 2019

The stock market is running out of reasons to go higher

Photo: Eduardo Munoz Alvarez/Getty Images

Stocks jumped on Monday as investors bought optimism that a U.S.-China trade deal could be salvaged, despite a lack of tangible evidence that progress is being made.

The state of play: The market will need the animal spirits of trade-war hope, because many of the fundamental catalysts that have buoyed stock prices in years past are starting to unravel.

By the numbers: S&P 500 companies are headed for an "earnings recession" to start the year, with earnings down 1.4% and 1.3% year-over-year in the first and second quarters of 2019, respectively, data from Morgan Stanley shows.

  • Profits, even at small and private companies, are turning negative, according to data from the Commerce Department's national income and product accounts.
  • Total U.S. corporate profits have fallen by close to 10% since the third quarter of 2018.

Why it matters: "Every time these profits have contracted in the past, the next 12 months’ job growth has been negative," Lisa Shalett, CIO of Morgan Stanley Wealth Management, said in a note to clients Monday. She is expecting the S&P 500 to drop to around 2700, thanks to the continued erosion of earnings and profit.

  • "As was the case in 1999, when S&P 500 profits diverged from the broader profit measure, the outlook for stocks is not positive," she says.

Investors are undervaluing the negative impact of the earnings recession, Morgan Stanley's chief U.S. equity strategist Mike Wilson warns.

  • Stocks were able to power through the last earnings recession in 2016, but there isn’t enough economic growth to get out the hole this time, he says, noting declining jobs growth and the ongoing U.S. transportation recession.

But wait, there's more. Companies are slowing the pace of stock buybacks this year, withdrawing a major buyer from the equity market as both institutional and retail investors have been net sellers of equities all year.

  • The stock market also will have to make up for the muted performance of the FAANG stocks, as shares of Facebook, Amazon, Apple, Netflix and Google parent Alphabet have provided limited upside over the past year, WSJ notes.
  • "All the stocks, with the exception of Alphabet, peaked last year and remain well below their records after a brutal selloff last fall wiped out billions of dollars in market value. The stocks have shed nearly $415 billion since August 2018 when their combined market value swelled to $3.7 trillion," writes WSJ's Michael Wursthorn.
  • FAANG stocks account for around 20% of the S&P 500's value.

Go deeper

Coronavirus dashboard

Illustration: Aïda Amer/Axios

  1. Global: Total confirmed cases as of 3 a.m. ET: 5,410,228 — Total deaths: 345,105 — Total recoveries — 2,169,005Map.
  2. U.S.: Total confirmed cases as of 3 a.m. ET: 1,643,499 — Total deaths: 97,722 — Total recoveries: 366,736 — Total tested: 14,163,915Map.
  3. World: White House announces travel restrictions on Brazil, coronavirus hotspot in Southern Hemisphere Over 100 coronavirus cases in Germany tied to single day of church services — Boris Johnson backs top aide amid reports that he broke U.K. lockdown while exhibiting symptoms.
  4. Public health: Officials are urging Americans to wear masks headed into Memorial Day weekend Report finds "little evidence" coronavirus under control in most statesHurricanes, wildfires, the flu could strain COVID-19 response
  5. Economy: White House economic adviser Kevin Hassett says it's possible the unemployment rate could still be in double digits by November's election — Public employees brace for layoffs.
  6. Federal government: Trump attacks a Columbia University study that suggests earlier lockdown could have saved 36,000 American lives.
  7. What should I do? Hydroxychloroquine questions answeredTraveling, asthma, dishes, disinfectants and being contagiousMasks, lending books and self-isolatingExercise, laundry, what counts as soap — Pets, moving and personal healthAnswers about the virus from Axios expertsWhat to know about social distancingHow to minimize your risk.
  8. Other resources: CDC on how to avoid the virus, what to do if you get it, the right mask to wear.

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Updated 2 hours ago - Politics & Policy

U.S. coronavirus updates

Data: The Center for Systems Science and Engineering at Johns Hopkins; Map: Andrew Witherspoon/Axios. This graphic includes "probable deaths" that New York City began reporting on April 14.

The CDC is warning of potentially "aggressive rodent behavior" amid a rise in reports of rat activity in several areas, as the animals search further for food while Americans stay home more during the coronavirus pandemic.

By the numbers: More than 97,700 people have died from COVID-19 and over 1.6 million have tested positive in the U.S. Over 366,700 Americans have recovered and more than 14.1 million tests have been conducted.

World coronavirus updates

Data: The Center for Systems Science and Engineering at Johns Hopkins; Map: Axios Visuals

Japan's economy minister outlined plans on Monday to end the nationwide state of emergency as the number of new novel coronavirus cases continues to decline to fewer than 50 a day, per Bloomberg. Japan has reported 16,550 cases and 820 deaths.

By the numbers: Over 5.4 million people have tested positive for the virus as of Monday, and more than 2.1 million have recovered. The U.S. has reported the most cases in the world (over 1.6 million from 13.7 million tests). The U.K. is reporting over 36,800 deaths from the coronavirus — the most fatalities outside the U.S.