Earnings season is winding down, with 483 of the names in the S&P 500 having reported results.
Although the fourth quarter wasn’t a disaster by any stretch of the imagination, 56.4 percent of the companies in the S&P 500 beat consensus revenue estimates—down from almost 60 percent in the third quarter of 2014.
However, slowing revenue growth is more worrisome. Companies in the S&P 500 grew their fourth-quarter top lines by an average of 1.43 percent from year-ago levels, compared to about 4 percent in the third quarter.
And three of the S&P 500’s 10 economic sectors—energy, basic materials and financials—suffered a year-over-year contraction in sales. In the third quarter, only the energy sector posted a decline in revenue.
This deterioration in sales and earnings growth gibes with the narrowing leadership we’ve seen in US equities. That is, although the S&P 500 continues to reach new highs, the number of participating stocks has narrowed. (See How to Spot a Bear Market.)
When the S&P 500 closed at a record high on Feb. 24, 2015, only 56 percent of the equities traded on the New York Stock Exchange were above their 200-day moving average. This number stood at about 65 percent when the benchmark index hit new highs in August and September 2014.
This thinning of the herd is characteristic of a late-stage bull market and suggests that the risk of a correction of 20 percent or more has grown.