In today’s market, everyday investors are being misled by the media’s reporting of corporate earnings results. Despite headlines suggesting a positive outlook, the truth is that corporate earnings are declining, not going up as they claim. It’s essential to understand this situation to protect your investments.
Let’s draw an analogy from the world of sports to illustrate this point. Imagine a basketball team, Last season, won 40 games, not enough to make the playoffs. Now, the media is setting low expectations for the team, projecting them to win just 10 games in the upcoming season. If the team manages to win 37 games, the headlines will claim they exceeded expectations and are an amazing team. However, the reality is that they did worse than the previous season, winning fewer games. This lowering of expectations creates a false sense of success.
The same deceptive strategy is at play in the stock market. Corporate profits have been falling year over year: Q4 2022 saw a 4.6% decline, Q1 2023 a 2% decline, and Q2 2023 is off to a bad start with a 7% decline so far. However, analysts have drastically lowered expectations, leading to 80% of earnings reports beating these manipulated projections. This situation is concerning, as it suggests either incompetence or intentional deception on the part of analysts.
As an investor, you have three choices. First, you can accept that most people are unaware of this manipulation and ride the market up, aiming to get out before the inevitable “rug pull.” Second, you can get ahead of the curve by understanding the true situation and positioning yourself accordingly. And third, you can adopt a buy-and-hold strategy, focusing on the long term and ignoring short-term earnings mania.
Currently, Q2 2023 earnings are being reported, showing a significant decline of 7%. What’s even more troubling is that Goldman Sachs predicts revenue growth to be flat, a trend not seen since the lockdowns. This earnings recession is likely to continue, leading to further economic challenges.
The stock market’s recent surge is attributed to the belief that the AI revolution will revolutionize corporate profits starting from July 1, 2023, and continue well into 2024 and 2025. While AI may impact some industries and companies positively, it’s premature to expect an immediate and widespread impact on the S&P 500’s profits as a whole.
In contrast to the market’s optimism, there are voices like mine that believe the worst is yet to come. GDP and corporate profits are showing downward trends, with Q3 and Q4 expected to be challenging. As a contrarian view, I see more downside potential. However, I recognize that markets can remain irrational longer than individuals can stay solvent.
It’s crucial to question the prevailing narrative and not fall into the trap of blindly following the herd. Understanding the true state of corporate earnings and the market’s real situation is essential for making informed decisions. As we face upcoming events like the Federal Reserve meeting, interest rate decisions, and GDP figures, staying vigilant is critical in protecting your investments.
In conclusion, don’t be fooled by misleading headlines and overly optimistic reports. Be informed, think critically, and make decisions based on the true state of corporate earnings and market conditions. This will help you navigate through uncertain times and safeguard your financial interests.