As of the writing of this post, the S&P 500 is down about 3% from its record set on March 2. Some of the selling could have come from profit taking or covering shorts, but much of it is due to concerns about future earnings. Last week I showed that profit rates are at record highs and reasonable investors would assume such rates are unsustainable based on the history. And that seems to be the case as Seeking Alpha's Brian Gilmartin wrote:
Looking at the first half of 2015, analysts are now projecting year-over-year declines in both earnings and revenues for both Q1 and Q2 '15, compared to expectations for earnings and revenue growth for both quarters back on December 31 '14.Gilmartin's sources expect a 2.7% drop in earnings for Q1 2015 compared to Q1 2014, and a 0.1% drop in Q2 before a rise of 2.2% in Q3. However, he goes on to show the impact of the drop in earnings from the oil industry, which are large, and then the earnings from the rest of the market excluding the energy sector. Obviously, earnings look much better when you exclude the losing sectors, but that type of analysis is what advisers do at market tops in order to convince people that the market will go higher. There is little reason to assume that the collapse in energy sector profits will have little impact on other sectors.
All sectors are not equally important, though. If you follow mainstream economics/finance you will fixate on profits in consumer goods industries, assuming consumer spending will force investment in other sectors. But followers of Austrian economics understand that production generates consumption. In fact, high profits in the consumer goods sectors are a harbinger that the Ricardo Effect is about to force a reversal in the economy. That's why falling profits in mining and energy are warning signs.