U.S. Stock Market Poised for Another Huge Drop

Douglas McIntyre
U.S. Stock Market Poised for Another Huge Drop
U.S. Stock Market Poised for Another Huge Drop

Few stocks other than Amazon (AMZN) and Apple (AAPL) are trading near their 52-week highs right now. The stock market, as measured by the S&P 500, sits at 1,131, a low point it hasn't traded near consistently since late 2009. There's every reason to believe it will decline back to the levels it hit just before and after the sickening sell-off that bottomed in March 2009. In other words, the next correction could drop the S&P 500 to below 900.

The most obvious reasons for a new leg down are the trouble in Europe, high unemployment, the troubled housing market and the slim chance of Congress agreeing to any federal government stimulus plan late this year or early in 2012. But the most powerful downward pressure on the market is likely to come from fourth-quarter earnings forecasts. Many of those will be issued before the end of October.

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Earnings have been solid for nearly two years thanks to most companies cutting their way to strong margins. But there appears to be little more in the way of expenses to eliminate. The means a near future outlook of lower earnings per share.The most vulnerable large industries are retail, automotive, consumer electronics, media and telecom. Each relies to a large extent on consumer activity. Each also relies heavily on strong fourth-quarter sales. As employment slips and consumer sentiment hits multiyear lows, the stocks of these companies will get battered. The other large sector in trouble is banking, although its problem is more related to balance sheet issues than consumer activity. The financial industry still has many of the most widely traded stocks, led by Citigroup (C) and Bank of America (BAC).

Optimists argue that with bank, retail and car manufacturing shares at 52-week lows, they're attractive based on P/E valuations and other standard measurements of value. But those metrics are only useful when the consumer economy is modestly stable. Right now, it's not. Free fall is a better way to describe the situation.

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