It was a bad day for stocks Tuesday, with investors focusing on the latest batch of disappointing earnings reports for the third quarter. Actually, investors seem to be more upset about disappointing revenues. So far, the misses have been greater and more widespread for revenues than for earnings. I've been monitoring the situation in recent weeks by closely analyzing the global economic indicators, which have been mostly on the weak side. So I haven't been surprised by the proliferation of negative revenue surprises. The question is, where do they go from here? I estimate that S&P 500 companies' revenues fell 0.7% year-over-year during the third quarter, reflecting slower global economic growth and strength in the dollar.
I think that will be a cyclical low because I don't expect further weakness in the global economy, although growth is likely to remain slow. Admittedly, Wednesday's weaker-than-expected business climate survey published by the German Ifo Institute doesn't support my relatively optimistic view. The German business confidence index fell to 100 for the sixth straight month from 109.7 in April; this is the lowest reading since January 2010. The current situation component declined for the fifth time in six months (by 10.1 points) to a 28-month low of 107.3. The expectations component was unchanged at 93.2, the lowest since May 2009. The expectations component correlates closely with German factory orders and production, and suggests further downside in both. The overall index tracks exports more closely; it indicates foreign demand slowing to a near standstill. An estimate of October's purchasing managers' index (48.1), measuring activity in manufacturing and services, showed Germany's private sector contracted for a sixth straight month.
Source: Ed Yardeni — Ed Yardeni is the president and chief investment strategist of Yardeni Research Inc., a provider of independent investment strategy and economics research for institutional investors.