With the brief reprieve the market enjoyed last week having dissipated, the S&P 500 is down 6.9% this year, while the Dow Jones Industrial Average has shed about 7.3%. Investors have digested the Federal Reserve's latest missive and decided that it's a lose-lose situation right now -- interest rates are higher, and they could go higher even in a slow-growth backdrop. Moreover, the Fed may have risked its credibility if the December rate hike pummels growth mid-year, forcing the central bank to slash rates back to zero.
But for all of the concerns out there pressuring stocks, what companies are saying (and not saying) this earnings season is equally troubling. The tone of management teams stinks. Financials are devoid of spunk. And these factors are causing investors to question whether valuations are cheap enough.
Here are five problems I have detected.
1. Dollar's strength is still biting...hard. Across the board this earnings season, the dollar's resilience has continued to be felt negatively on financial statements. We are talking 5% (or higher) hits to revenue, and well over $0.10 per share whacks to earnings. Company executives have found no way to mitigate the pressure as price increases in areas such as Brazil have hurt demand, while there continues to be a reluctance to dramatically reduce costs overseas.
The dollar's strength looks like it will continue to plague companies, unless the U.S. falls into recession and capital flies back to emerging markets that are growing.
2. Interest rate increase takes its toll. The CFO of Royal Caribbean Cruises (RCL) told me yesterday that Wall Street forgot to factor the recent rate increase into earnings projections. For the cruise line operator, floating rate debt comprises about 31% of its $7.7 billion in total debt. Higher rates will hurt first-quarter EPS by $0.06, contributing to the overall subdued outlook for 1Q that pummeled the stock. Investors continue to operate in the mindset that rates were not hiked by the Fed, but companies are starting to say "Wake up, the negative impact to profits will be real."
3. No trust in optimistic outlooks. The market is not buying what some companies are selling. Those that had good years in 2015, such as Trifecta Stocks holding United Parcel Service (UPS) and Royal Caribbean, have come out with generally upbeat earnings outlooks for 2016. Unfortunately, given the cracks emerging in the U.S. economy and slowing markets overseas, investors are erring on the side of caution with respect to any profit outlook that predicts double-digit percentage gains.
When there is a lack of trust in what good companies are pitching, it's a red flag.
4. U.S. consumer viewed as the savior, which is not good. So far this earnings season, the U.S. consumer has saved the day. UPS saw huge package increases during the peak holiday period. Royal Caribbean noted demand for cruises by the North American consumer remain strong. Sherwin-Williams' (SHW) earnings last week suggested people are continuing to buy paint. But such a reliance on the U.S. consumer may turn out to be a negative in 2016 due to the weakness in stock prices and rising job-slashing restructuring announcements.
There are already numerous pockets of consumer weakness surfacing, such as lower spending at restaurants in oil markets. Further, UPS warned on Tuesday the first half of the year would be challenging for the economy.
5. Stock buybacks are not a given. Boards aggressively green lighted the use of cash to repurchase shares into the end of 2015. The declines in share counts, year over year, for many companies were dramatic -- it's something that greatly benefited earnings per share. However, there is currently a sense of wait and see among execs on whether to buy back stock in light of January's selloff.
In other words, execs don't trust that the selling has abated, which means the market is losing a key area of support (buybacks).