Corporate profit margins are near record highs, usually a cautionary situation by itself. And Wall Street is forecasting still higher S&P 500 earnings ahead.
Until this week Wall Street economists had been in a similar see no problem mode for the economy. In spite of GDP growth declining to just 1.8% in the 1st quarter from 3.2% in the December quarter, and the miserable economic reports since, they had not lowered their forecasts for 2nd quarter and 2nd half GDP growth of 3.2%.
Until this week that is. Now the revisions have begun, JP Morgan, and Bank of America/Merrill Lynch lowering their GDP forecasts so far to between 2.0% and 2.5%. But this is just the beginning. If you recall in the weeks just prior to the release of 1st quarter GDP there was a panicked scramble to revise estimates lower almost by the week, and still they didn't get them low enough.
Meanwhile, there is no credible argument anymore that the U.S. economic recovery is intact and only running into a brief slow patch. And a significantly weaker economy cannot support current earnings forecasts.
While Wall Street has yet to begin downgrading its S&P 500 earnings forecasts, corporations are not waiting.
Already warnings that sales and earnings will be worse than currently expected have been issued by some of the world's largest technology companies, including Cisco Systems (CSCO), Hewlett-Packard (HPQ), Logitech (LOGI), Nokia (NOK), Research in Motion (RIM), and Sony (SON); and major retailers including Home Depot (HD), WalMart (WMT), Sears (SHLD), The Gap (GAP), and Aeropostale (ARO).
And no wonder.
The merry month of May was anything but, with its reports of deteriorating conditions in April that were much worse than forecasts, as measured by the ISM Mfg Index, the ISM Non-Mfg Index, Factory Activity, and Industrial Production. There was the first drop to a negative reading by the Leading Economic Indicators in 9 months, the largest decline in Durable Goods Orders since last August, big plunges in new home starts and permits for future starts. There were big declines in existing home sales (now down 12.9% YTD), and home prices, while consumer spending rose in April by the smallest amount in 3 months.
Those reports were for April, the first month of the 2nd quarter. Now the reports for May are coming in, and are even worse.
In the last week or so it has been that the Empire State (NY area) Mfg Index, the Philadelphia Fed Index, and the Dallas (Texas area) Fed Index, plunged dramatically in May. Pending Home Sales unexpectedly fell 11.6% in April, to a 7 month low, a negative for actual sales in May and June.
This week it has been the Case-Shiller Home Price Index, which showed home prices still falling.