Earlier this week, the International Monetary Fund (IMF ) issued its 2014 and 2015 global economic forecast, which called for global growth of 3.7% this year and 3.9% in 2015. As I tell subscribers to my investment newsletter PowerTrend Profits, it’s almost meaningless to accept or believe the forecasted figures particularly when it is so early in the year. Instead, the vector or direction of the forecast is far more meaningful this early on. From that perspective the IMF expects the global economy to grow more in 2014 and 2015 than it did in 2013.
In the face of that forecast, we’ve received a number of corporate earnings reports and while a good number have fell short of expectations, it’s the ones that are cutting their outlook that are weighing more the S&P 500 and its ETF sister SPDR S&P 500 ETF Trust. It began with several retailers — Sears Holdings SHLD -2.26%, Gap GPS -1.12%, JC Penney JCP +0.3%, American Eagle Outfitters AEO -9.64%, Bed Bath & Beyond BBBY +1.07% and Pier 1 Imports (PIR), among others — sharing their holiday sales were not what had been expected by many on Wall Street. Soon thereafter, we heard the same from Best Buy BBY +0.12% and hhgregg, Inc. (HGG) as well as a new round of 5,000 layoffs at Intel INTC -1.47% — that’s roughly 5% of the company’s workforce. Other layoffs were announced by Target TGT -0.81%, Texas Instruments TXN -1.08% and more as well as rumored layoffs from IBM IBM +0.41% and Sprint-Nextel (S).
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That more than concerning news was added to this week when both IBM IBM +0.41% and Johnson & Johnson JNJ -1.48% delivered quarterly results that were as expected, but fell short with their respective guidance for 2014. Then today we learn that both China and the US flash PMI readings not only fell short of expectations, they both contracted month over month. The news underneath the headline data was encouraging either because that slower order growth pointed to the likelihood of softer PMI readings ahead.
All of this will cause Wall Street and individual investors to re-examine their growth expectations for at least the first half of 2014. Currently the S&P 500 is trading at 15x the earnings Wall Street expects  it to deliver in 2014 (more on that in a few sentences). As I always say, a stand alone figure is meaningless without some context. First, that multiple is well above the 13.6x the S&P 500 bottomed at in 2013. More importantly however, it’s the underlying assumption of the S&P 500 earnings growth that is raising flags to many professional investors given recent earnings and economic data we’ve received.
Current consensus earnings per share for the S&P 500 stands at $119.74 for 2014, up 10% from $108.58. For perspective, that’s nearly double the 5.3% the S&P 500’s earnings per share (EPS) is tracking to have grown in 2013 vs. 2012. If the earnings misses outnumber the earnings “beats” for the December quarter and corporate outlooks are as clear as mud — which is something we have been seeing over the last few weeks,  odds are we will see a negative revision to 2014 earnings expectations for the S&P 500. That situation will lead many people to question their market multiple expectations and we could see overall market move lower.
That means eyes and ears will be glued to the more than 700 companies that will report their quarterly earnings and expectations next week. Apple AAPL -0.94%, Google GOOG -0.28%, Qualcomm QCOM -0.51%, Caterpillar CAT -1.1%, Ford Motor F -1.15%, DuPont and more are on tap next week. What’s the tone of the consumer? What is really going on in Europe and China? Are inventories too high or too low? Are enterprises really starting to spend again? All of these questions will give us a better sense of the global economy’s health, and that will tell us how accurate the IMF’s global growth forecast is or isn’t for 2014.