Tuesday, November 13, 2012

Earnings Cliff?

Before we examine the microeconomics of earnings, let’s have a look at the macro picture. It’s surprisingly upbeat currently. Now that profit margins are back at previous cyclical highs, earnings will be driven by revenues, as long as margins hold steady. S&P 500 revenues per share is highly correlated with manufacturing and trade sales in the US, which jumped 2.8% over the past three months to a record high during September. The y/y growth in business sales is up 4.4%, edging up from a recent low of 2.8% during July. 
There are lots of potential shortcomings with this macro analysis. US business sales are limited to goods. The data do not include sales of services. A significant portion of S&P 500 revenues comes from abroad. The business sales series does capture merchandise exports, which are also highly correlated with S&P 500 revenues. Exports rose to a new record high during September as well. However, revenues generated by sales of goods and services produced abroad by S&P 500 companies are not reflected in either US business sales or US merchandise exports.

With the global economy depressed by a recession in Europe and slower growth in emerging economies, the strength in US macroeconomic data has been offset by weakness abroad. That’s clear from the 90% of S&P 500 companies reporting so far that their Q3 revenues fell 1.5% y/y. A resolution of the US fiscal cliff before the end of the year should set the stage for a rebound in revenues and earnings growth to 6%-8% next year. If we go over the cliff, all bets are off.

Today's Morning Briefing: Earnings Cliff Too? (1) Analyzing the analysts. (2) Earnings Tuesday and Revenues Thursday. (3) Downward slope rather than cliff. (4) Micro vs. macro earnings. (5) Surprisingly upbeat macro picture. (6) US business sales and exports at record highs! (7) Lots of downward trends among earnings estimates. (8) However, S&P 500/400/600 forward earnings at or near record highs. (9) Chopping quarterly estimates through next year. (10) The big losers are Industrials, IT, and Materials. (More for subscribers.)

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