The stock market isn’t likely to get any jolts from earnings this year. The profit margin of the S&P 500 probably peaked last year. I don’t see any upside for it this year or next year. There could be some downside if labor costs increase at a faster pace as I expect. The biggest labor cost pressures may not be in America for most S&P 500 companies, which tend to be large multinational enterprises. They have been expanding their payrolls less in the US than abroad, especially in emerging countries where labor costs have been low. But that may be changing, as wages are rising faster now in countries like China and India.
If the S&P 500 companies can manage to maintain their profit margins at the 2011 levels, then earnings will increase at the same pace as revenues. During 2009, the bears dismissed the rebound in earnings by claiming that it was all attributable to unsustainable cost cutting and the revenues wouldn’t grow enough to drive earnings higher on a more sustainable basis. They were wrong.
S&P 500 revenues are highly correlated with manufacturing and trade sales, which include manufacturing shipments and distributors’ sales. The growth rates of the two are nearly the same. The business sales data are available monthly, while the S&P 500 revenues are compiled quarterly. The former was up 8.9% y/y through December and 29.4% since the cyclical low during April 2009, while the latter was up 10.4% y/y through Q3-2011 and 19.9% since Q1-2009.
What’s the outlook for revenues this year? They are unlikely to grow as fast as last year. I figure the growth rate could be roughly half as much, or around 5%. I am factoring in slower global economic growth this year with weakness concentrated in Europe. I see S&P 500 earnings up only 3% this year to $100 per share as a result of slight pressure on profit margins. Next year, I expect that both earnings and revenues will increase 7%. (More for subscribers.)