The last two quarters we have seen quite a deceleration in S&P 500 earnings – in fact the S&P 499 has been flatlining. But Apple has a massive out sized effect on earnings (and hence supporting S&P 500 earnings growth). The NYT has a piece out this morning where they extrapolate a potential negative growth rate on said earnings, even with Apple. With export revenues hurt by Europe and to a lesser degree "emerging markets" (China, India, Brazil, et al) and profit margins falling from record highs, this is definitely an issue. That said stock prices are part earnings and part multiples – multiples are always an unknown; we saw how high they could get in 1999 when Uncle Alan flooded the world with liquidity ahead of Y2K.
- Wall Street analysts expect earnings for the typical company in the S.& P. 500 to decline 2.2 percent in the third quarter from the same period a year ago, according to Thomson Reuters, the first such drop since the third quarter of 2009. Earnings are expected slide 3 percent from the second quarter of 2012.
- “A lot of the profit gain you had in the last few years was a bounce from the recession and a result of very aggressive cost-cutting,” said Ethan Harris, chief United States economist at Bank of America Merrill Lynch. “Those factors are going to be very hard to replicate.”
- What is more, 88 companies have already said that results will come in below expectations; 21 that have signaled a positive outlook, said Greg Harrison, corporate earnings research analyst at Thomson Reuters. “That’s much more pessimistic than normal,” said Mr. Harrison, who added that the third quarter of 2001 was the last time that earnings guidance leaned so heavily to the downside.
- After rising steadily in the wake of the recession, profit margins for S.& P. 500 companies peaked at 8.9 percent in late 2011, said David Kostin, chief United States equity strategist at Goldman Sachs. Margins are expected to fall to 8.7 percent in 2012. (still a great figure)
- While profit margins have plateaued in corporate America, productivity gains in the overall economy have ebbed as well. After rising at an annual rate of 2.9 percent in 2009, and a 3.1 percent pace in 2010, productivity inched up 0.7 percent in 2011, according to the Bureau of Labor Statistics. “There’s only so much you can cut,” said Chad Moutray, chief economist at the National Association of Manufacturers.
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund's holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog