Join        Login             Stock Quote

Turning Toward Earnings

 November 27, 2012 11:46 AM

Q3 earnings season's winding down, with 487 S&P 500 companies reporting through Friday and 6 more up this week. For companies reporting thus far, aggregate earnings per share (EPS) grew 0.1% year over year1—a lackluster headline figure, but not necessarily indicative of the bull market's end or economic headwinds.

Earnings typically slow or even contract as bull markets mature, and historically, slowing earnings haven't automatically meant slowing equity returns. As Exhibit 1 shows, when earnings have slowed or contracted during bull markets, stocks have averaged double digits over the following year.

Exhibit 1: Slowing/Declining EPS Growth and 12-Month Forward Returns


[Related -Automating Ourselves To Unemployment]

Source: Global Financial Data, Inc., S&P 500, Fisher Investments Research, as of 10/31/2012.

Case in point: Earnings growth slowed during much of the 1990s bull market, but stocks marched on. (Exhibits 2 and 3.)

Exhibit 2: S&P 500 EPS Growth (y/y), 1990 – 1999


[Related -Fed: Waiting For June… Or Godot?]

Source: Thomson Reuters, Standard and Poor's, as of 10/31/2012.

Exhibit 3: S&P 500 Total Return, 1990 – 1999


Source: Thomson Reuters, as of 10/31/2012.

One big reason Q3 earnings were flattish: Q3 2011 set a high benchmark for y/y comparisons. Then, aggregate EPS grew nearly 20% y/y, logging an all-time high of $239.2 billion. Gangbusters growth off that high base would be a somewhat unreasonable expectation, especially after 3.5 years of bull market and 11 straight quarters of EPS growth—hence, when earnings season began, analysts expected a modest contraction. That results defied expectations and aggregate earnings inched up to $239.3 billion is nothing to sneeze at.

Taking a more granular look, while aggregate earnings barely grew, results weren't uniformly weak. Five sectors saw earnings growth, with Consumer Discretionary leading the way at 12.3% y/y. Energy and Materials provided most of the weakness. Their aggregate EPS fell -16.4% and -26.6%, respectively, mostly due to falling commodity prices—not necessarily a sign of economic weakness. In fact, cheaper commodities could buoy other industries' earnings in the period ahead due to reduced input costs. The sectoral disparity was even starker in top-line figures. Aggregate S&P 500 revenue-per-share (RPS) fell -0.8%, but only Energy and Materials contracted. The remaining sectors averaged 2.3% y/y aggregate RPS growth, signaling plenty of underlying health in the US economy.

So despite slowing earnings, stocks and the economy should be fine. But that doesn't mean all market segments have equally bright outlooks. As bull markets mature and earnings growth tapers, the biggest companies—those "mega caps" exceeding the market's weighted average market cap—tend to do best. In these environments, investors look for companies they believe best able to weather the storm. They seek traits like earnings stability, balance sheet strength, strong brand names, high market share and geographically diverse revenue streams—hallmarks of mega caps. Thus, the biggest firms have historically outperformed small cap by a wide margin in late-stage bull markets. This trend appeared to take hold earlier this year, and mega likely carries the torch for the foreseeable future.

Looking ahead, a flattish Q3 doesn't mean earnings must stagnate—analysts expect growth to pick up. Aggregate EPS growth is currently expected to reaccelerate to 4.2% in Q4 and higher in 2013. Granted, expectations have ratcheted down in recent weeks, but that's been the case much of this bull market. Earnings have consistently beaten too-dour expectations, and that trend seems unlikely to abate soon. Yes, risks are ever-present, but fundamentals remain stronger than most appreciate. Corporations are healthy, growing and profitable, and in our view, this bull market has room to run.

source: Market Minder
Disclaimer: This article reflects personal viewpoints of the author and is not a description of advisory services by Fisher Investments or performance of its clients. Such viewpoints may change at any time without notice. Nothin herein constitutes investment advice or a recommendation to buy or sell any security ot that any security, portfolio, transaction or strategy is suitable for any specific person. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.


Post Comment -- Login is required to post message
Alert for new comments:
Your email:
Your Website:

rss feed

Latest Stories

article imageAutomating Ourselves To Unemployment

In this current era of central planning, malincentives abound. We raced to frack as fast we could for the read on...

article imageFed: Waiting For June… Or Godot?

The Federal Reserve left interest rates unchanged yesterday, as widely expected. But the possibility of a read on...

article imageThe Single Best Place To Invest Your Money For Retirement

It was never supposed to be this daunting. At least that's what we were read on...

article imageNegative Blowback From Negative Interest Rates

The Federal Reserve is widely expected to leave interest rates unchanged today. But perhaps standing pat read on...

Popular Articles

Daily Sector Scan
Partner Center

Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.