Red Hot Stock Market on Thin Ice

U.S. stocks have rallied since mid-February after the worst start ever. With an economic slight-of-hand, you could even say the stock market is at its highest levels in 2016, but that isn’t saying much.

U.S. stocks may be positive for the first time this year, but the foundations on which the bullish S&P 500 are founded are a mirage. U.S. fourth-quarter gross domestic product (GDP) was bad, revenue and earnings are worse, growth prospects in China remain weak, and the Federal Reserve remains dovish about the U.S. economy. The stock market may be red hot, but there’s no real reason for the euphoria.

U.S. Stocks at Highest Levels in 2016!

U.S stocks are at their highest levels in 2016! But that’s not really something investors should be patting their backs over. It’s all relative.

This year began with the worst two-week period ever for the U.S. stock market. And then it got worse. Between December 31, 2015 and February 11, 2016, when the markets bottomed, the S&P 500 fell 10.5%, the Dow Jones Industrial Average lost 10.1% of its value, the NASDAQ fell almost 15.0%, and the Russell 2000 Small Cap Index tanked an eye-watering 17.0%.

U.S. stocks fell in the first six weeks of 2016 on the heels of weakening growth prospects in China, sub-one-percent fourth-quarter U.S. GDP, and crashing commodity prices. Investors were fleeing the stock market in droves.

Red Hot Stock Market Belies Weak Stocks

For the most part, though, the U.S. market has experienced a reversal of fortune. Again, it’s relative. The S&P 500 is up approximately 13.0% since February 11, but it’s up less than one percent in 2016. The Dow Jones has rebounded more than 11.0% over the same timeframe but is up slightly more than one percent since the beginning of January.

Unfortunately, that growth is not based on anything sustainable. Growth prospects in China remain weak. Central banks in the European Union and Japan didn’t exactly introduce fresh rounds of monetary stimulus because their economies are doing well. And the Federal Reserve didn’t raise interest rates out of the kindness of its heart.

The fact is U.S. stocks are being propelled higher by near-record corporate share repurchase programs and the Federal Reserve’s overly generous easy monetary policies. It can’t be because of fourth-quarter financial results and the outlook for the first quarter.

Of the 118 companies that have issued earnings per share (EPS) guidance for the first quarter, 92 (78%) have issued negative EPS guidance and 26 (22%) have issued positive EPS guidance. The estimated year-over-year earnings decline for the first quarter of 2016 is -8.4%, which is below the expected earnings growth rate of 0.3% at the start of the quarter. 

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