Tuesday, September 4, 2012


I’ve been bullish on the earnings-led bull market in stocks since March 2009 because I believed that it would continue to be led by earnings. So far, so good. However, as I’ve been noting lately, the bull is running out of earnings power. Consider the following:

(1) S&P 500 Earnings Per Share. I regularly focus on weekly S&P 500 forward consensus expected operating earnings, which has stalled around $111 per share since May. The quarterly data for S&P 500 operating earnings per share also has lost its upward momentum recently.

(2) After-Tax Net Income. Also running out of steam is the aggregate net income of the S&P 500. It is highly correlated with the after-tax corporate profits measures reported along with GDP in the National Income & Product Accounts (NIPA).

(3) Pre-Tax Profits by Source. The Bureau of Economic Analysis disaggregates the components of NIPA profits on a pre-tax basis. The data show that the domestic profits of nonfinancial corporations rose to a record high of $1.1 trillion (saar) during Q2, up 7.0% y/y. However, profits of financial corporations have stalled in a zigzag fashion over the past three years, while profits from the rest of the world have fallen from a recent peak of $451 billion during Q4-2011 to $422 billion during Q2-2012.

(4) Financial Corporate Profits. The S&P, NIPA, and FDIC measures of financial corporate profits are looking especially toppy. The FDIC data show that commercial banks have been reducing their provisions for loan losses from a peak of $71 billion during Q4-2008 to $14 billion during Q2-2012. That has boosted earnings. However, charge-offs for bad loans have exceeded provisions since Q1-2010, which is a drag on earnings.

(5) Profits from Abroad. I’ve been arguing that despite the global slowdown, US corporations would find enough business opportunities overseas to offset slower growth in the US. The latest data show I got that exactly backwards so far. Domestic profits rose to a record high, as noted above. Profit receipts from abroad, which account for 33.4% of pre-tax corporate profits, declined 3.2% y/y, the weakest growth rate since Q3-2009. The problem is that the y/y growth in profit receipts from abroad tends to be inversely correlated with the trade-weighted dollar on a 2-for-1 basis. The dollar is up 8.8% y/y through July, implying a decline twice as much for overseas profits.

Today's Morning Briefing: Back to School. (1) September is just another month. (2) Let’s not ask Clint Eastwood. (3) More upside for P/E than E. (4) Nonfinancial corporate domestic profits still strong. (5) Financial profits have stalled. (6) Weak global growth and strong dollar weighing on profits from abroad. (7) Ben and Mario are two wild and crazy guys. (8) Ben proudly injects steroids into the bull. (9) Mario wants to fix blockages. (10) “The Bourne Legacy” (-). (More for subscribers.)


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