by Michael Roberts
At the end of February, the S&P 500 stock index closed at a
record high and the Nasdaq Composite (an index of hi-tech companies)
briefly rose above 5000, the level last achieved in the bubble back in 2000.
But we may well be near the end of this stock market bonanza, six
years after the S&P embarked on a bull run, resulting in a rally of
250%, including the reinvestment of dividends. Profits for US companies
are expected to decline over two consecutive quarters for the first
time in six years. Not since the aftermath of the financial crisis have
S&P 500 companies recorded two straight quarters of falling profits
on a year-over-year basis.
The profits of the S&P 500 multinational companies with
significant global operations are now being pressured by a record high
dollar, which results in lower foreign revenues. And energy companies
have been hit hard by significant reductions in their earnings as oil
prices have halved since the summer. Deflation in energy and fuel
prices may help consumers a little, but it is real bad news for the
profitability of energy multinationals.
Analysts are forecasting a decline of 4.6% in Q1 2015 S&P 500
earnings compared with the same period a year ago, with those for the
second quarter are seen falling 1.5%. That would represent the first
back to back quarterly decline since the second and third quarters of
2009 at the depth of the Great Recession.
And it is not just energy companies. Utilities, materials, telecom
services, consumer staples and information technology corporations are
forecast to record negative year-over-year earnings growth for the first
quarter. And since the early 1990s, the only times that earnings per
share have fallen in the US have been at the onset of recessions, in
2000 to 2002 and 2007 to 2009.
And it’s not just earnings of the top companies that are set to
decline. Profits for the whole US corporate sector have now stopped
Increasingly, the stock market has been supported simply by an
injection of billions in credit by the Federal Reserve. Financial firms
and non-financial corporate have been flush with cash that they have
raised from the issuance of corporate bonds at extremely low rates of
interest. This cash has then been invested in the stock market and in
paying out dividends and buying back stock, so encouraging others to buy
stocks. Only a small proportion has been used to invest in new
technology and more labour
And profits have also been artificially sustained by significant cuts
in corporation tax and other exemptions from tax. For example, Warren
Buffett’s investment company, Berkshire Hathaway has been able to defer
$62bn in taxes, that’s eight years of taxes, because the company has
bought capital intensive businesses like railways and power utilities.
That has given the company even more funds to invest in the stock
market. Berkshire’s Energy unit receives tax credits for renewable
power generation — reporting $258m of wind energy tax credits in 2014,
and $913m of investment tax credits in 2012 and 2013 for opening new
solar power plants. This is interest-free borrowing made possible by
the taxpayer because of the business-friendly government.
But as I have argued in previous posts
the days of low interest borrowing and investment speculation are about
to come an end. It seems that the Federal Reserve is going to start
raising the floor on interest rates this summer, leading to rising
mortgage and corporate bond rates. That could spark a significant drop
in stock market prices and even kick off a new recession.
Back in 1937 during the Great Depression, it appeared to the US
authorities that the slump was over and it was time to ‘normalise’
interest rates. On doing so, the economy promptly dropped back into a
new recession that was only overcome when the US entered the world war
in 1941. The reality was that the profitability of capital and
investment had not really recovered and raising the cost of borrowing
tipped the economy back
But why would the Fed do this if there is such a danger? Precisely
because it wants to cool a speculative stock and bond market and, most
important, avoid a sharp rise in wages that could squeeze profits as the
labour market tightens.
If the Fed does move later this year, it could start to expose just
how much fictitious capital (as Marx called stock and bond investment)
has built up in the US and other economies and see it go up in smoke.
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