The stock market sold off last week (7/20-7/24) as companies reported their second-quarter 2015 earnings. Although the market is roughly unchanged on the year, companies have been reporting declines in sales and declines in profits. This is a concern because when we own a stock, we essentially own a claim on the company’s ability to earn profits. If profits are declining–whether because of China, commodities, or currency–that means the earnings are going down. Here is more from the Wall Street Journal, 7/24/15, “Morning MoneyBeat: Don’t Expect Much From Revenues This Season”
“The S&P 500 is expected to post a second-quarter sales decline of 4%, its worst quarterly performance since 2009… Without healthy top-line expansion, it’s going to be challenging to sustain earnings growth and that could keep a lid on stock gains. Not only are sales projected to decline in the second quarter, analysts surveyed by FactSet see them contracting in the third and fourth quarters too. And as we wrote on Thursday, the S&P 500’s price-to-sales ratio, one of many valuation gauges, is at its highest level since 2000.
Slow growth abroad, a rising U.S. dollar and oil’s plunge are all weighing on sales as they did in the last reporting period. Of the 154 S&P 500 companies that reported through the open Thursday, 67 mentioned dollar headwinds [currency], 43 addressed China and 61 hit on the impact of commodities, according to earnings estimate firm Estimize.”
It’s possible that all three of these factors: China, declines in commodities prices, and currency moves (the strengthening dollar) are all temporary factors. Yet, they are significant enough that companies are mentioning them during their earnings calls.