That S&P500 revenues are contracting for the second quarter in a row (i.e. a revenue recession) is by now well-known even to CNBC. This is just as we predicted in June of last year, because in a world devoid of growth capital expenditures (and judging by the amount of train, plane and other crashes lately, maintenance capex as well), there can be no organic growth.
What, however, may come as a surprise to the market cheerleaders (who unknowingly, or knowingly, are merely cheering Ben Bernanke’s magic bubble blowing machine, see final chart) is that that other key component of bottom line improvement, profit margins, are not only not at record highs contrary to what conventional wisdom may incorrectly believe, but have been consistently sliding for three years now, and while earnings margins are ‘only’ back to June 2011 levels at 8.7%, it is the far more critical Operating Margin which has tumbled in the past two years after peaking in Q3 2011 and is now back down to 8.4%, a level not seen since mid-2010.
In other words, absent aggressive levered stock buybacks (which are virtually over with rates rising once again), the S&P500 EPS would now be in free fall.
Don’t worry though, just like in 2010, 2011, and 2012, there is a hockeystick for that. As the Goldman chart below shows, one just needs to believe in unicorns and that maybe, finally, this time things will simply surge higher just because the Fed wishes them to.
What is even more disturbing is that a few more quarters of contraction and margins will slide right back to the levels last seen during the past peak of 2006-2007, when companies still had millions of full-time workers they could fire or simply replace with part-time equivalents. This time around, they don’t have that gross profit-boosting luxury. And with interest rates once again rising, the benefits from refinancing corporate capital structures at ever lower rates are now forever gone.
Of course, the charts above are completely irrelevant, as is all fundamental information in a centrally-planned world, as long as the one all important chart remains. The one shown below.