Bull market problem: Disappearing sales growth

Published Mon, Jan 26 201510:32 AM EST

Can the bull market continue if companies aren't growing their top line? That's the question investors thinking about buying stocks need to ask themselves as the latest figures show analysts forecasting little revenue growth for 2015. This leaves cost-cutting, buybacks and multiple expansion as the only ways for the market to drive returns this year as the strong dollar, collapse in commodity prices and weak overseas demand eats away at the top line. The technology sector may outperform as it bucks these sales-growth woes by making a run at a double-digit revenue increase this year. As it stands now, analysts expect companies in the S & P 500 Index to post 2.4 percent revenue growth in 2015, according to S & P Capital IQ, down from 4.1 percent growth predicted at the start of December and also lower than the 10-year average at around 6.5 percent. And because analysts are typically too bullish to start the year, the actual number when all is said and done could be flat to negative barring a mighty big pickup in U.S. and global economic growth. The last time revenue growth was negative was in the wake of the financial crisis in 2009. That's also when this bull market began. One number the bulls can hang their hat on is earnings growth expectations for this year. Analysts still expect companies to squeeze 5.2 percent earnings growth out of that weak top line. Not too bad relative to basement-level interest rates and relative to growth for other global developed markets. "The bottom line here is that U.S. companies will have to sing for their supper in 2015 if they hope to see their equities advance," strategist Nicholas Colas said in a report to clients last week. "We don't need to see double digit sales growth to spur equities higher, but 2-3 percent is a reasonable line in the sand." The chief market strategist at Convergex raised the disappearing revenue growth question in his report looking at expectations for companies in the Dow Jones Industrial Average for the first quarter of this year. Top-line growth expectations for Dow companies in the first quarter are just 1.4 percent (2.8 percent excluding energy), according to Colas. "We're not quite to a 'Deflationary Dow,' where revenue growth turns negative. But we are getting close…too close perhaps." Read More Here are the best earnings season trades left The tech sector however is expected to keep trucking along, growing revenue by 10.4 percent in 2015, according to S & P Capital IQ. "Technology has the best top-line momentum and they have a lot of favorable market conditions like the rapid increase in need for memory space, a fast-growing mobile industry and China," said Lindsey Bell, senior analyst at S & P Capital IQ. Investors will get a peek at that growth divergence this week when Apple , Facebook and Google report results. Many strategists see these earnings reports causing the tech sector to break away from the rest of the market. The Technology SPDR ETF , like the market, is little changed for 2015, but returns have been picking up with an almost 4 percent gain last week in anticipation of these results. "Technology demands from corporate enterprise refreshes to cyber security and mobility-driven business transformations almost compel management teams to keep investing or fall strategically behind in a very wide variety of industries," Citigroup's Tobias Levkovich wrote in a report Friday. "Thus, the environment for IT suppliers is favorable especially with good cash flows, still low funding rates and a desire to sustain productivity enhancement." Citigroup's chief U.S. equity strategist points out that stock performance has become even more linked to changes in profit expectations over the last 20 years and therefore he is recommending technology and consumer discretionary stocks to clients. Read More This measure says stocks are really cheap…maybe To be sure, not everyone is worried about the possibility of no sales growth this year. "Lack of revenue growth has been a factor since the bull market began," said Stephen Weiss of Short Hills Capital and CNBC's "Halftime Report." "With GDP growing 3-5 percent and companies more productive than ever, a lot will fall to bottom line, but sector selection is critical."

A trader works on the floor of the New York Stock Exchange.

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Can the bull market continue if companies aren't growing their top line?

That's the question investors thinking about buying stocks need to ask themselves as the latest figures show analysts forecasting little revenue growth for 2015.

This leaves cost-cutting, buybacks and multiple expansion as the only ways for the market to drive returns this year as the strong dollar, collapse in commodity prices and weak overseas demand eats away at the top line.

The technology sector may outperform as it bucks these sales-growth woes by making a run at a double-digit revenue increase this year.