As the Q4 2009 earnings season comes to a close itâ??s important to take a look at the overall earnings picture. With over 98% of the S&P 500 reporting it looks like Q4 earnings will come in a little shy of $16.80. As we fully expected the analystâ??s estimates once again proved to be well below the mark as 72% of all companies outperformed expectations. This has resulted in substantial estimate increases and has been one of the primary reasons why we have maintained that investors could not short this market for the entirety of the last year. The earnings upgrade cycle has served as wind at the marketâ??s back, but the optimism is now becoming an impediment.
In the last year analysts have substantially contributed to the equity rally as they upgraded stocks and increased their estimates. The â??Monday upgradeâ? rally has become a hallmark of the move higher in stocks as analysts spend their weekends adjusting estimates and preparing for Monday morning upgrades and downgrades (though mostly upgrades). In just the last 8 weeks analystâ??s Q1 2010 estimates have jumped 4%. In addition, they are growing increasingly optimistic about the latter portion of the year (where I believe things get potentially messy). The H2 estimates have continued to creep higher as Q4 earnings were released. Analysts are now calling for $78 in operating earnings for FY 2010. The 2011 estimates have also surged. Analysts now expect $94 in operating earnings for 2011. That would represent back to back years of 20% earnings growth - something that has never happened before in the history of the United States equity market.
The real problems lie in the latter portion of 2010. Analysts are currently calling for 38% year over year growth for Q2, 30% year over year growth in Q3, and 27% growth in Q4 2010. Granted, these are coming off of easy comps, however, we have yet to see any real revenue growth. Including the very easy comps with financials, sales grew just 5% year over year in Q4. If we exclude the financials revenue growth was nearly non-existent at just 1.1% year over year. This is best visualized in the image below which shows the S&P 500 by revenue per share. The trough is clear, but there is certainly no v-shaped recovery here. At best, we are bumping along the bottom.
We are well into the economic recovery (ISM at 5 year highs and record highs in the ECRIâ??s leading indicators) and the ultimate L-shaped recovery remains in corporate revenues. The vast majority of the rebound in earnings is non-organic and unsustainable. Margins have expanded to pre-crisis highs as companies squeeze every last drop down to the bottom line. Analysts expect earnings to return to near 2007 levels without any real revenue growth. I find that hard to believe. If youâ??re still confused as to why insider buying is non-existent in this market look no further than the revenue line of corporate income statements.
As sentiment has becomes very optimistic in recent weeks the Expectation Ratio has taken a bit of a spill. The ratio peaked in the back half of 2009 along with the market and is now forecasting a far more difficult future for corporate earnings. Without a substantial acceleration in revenues it is unlikely that this market is headed anywhere fast. While it looks as though we likely have one more quarter of very easy earnings comps (Q1 2010) the real test will come in the latter portion of the year where estimates are extremely optimistic. With little to no signs of organic growth I find it hard to believe that the bull market in earnings can continue. That will serve as a major hurdle for the equity markets in 2010.*
* The ER is a longer-term indicator that not only forecasted the 2007 & 2008 downturn, but also forecasted the 2009 bottom in stocks well in advance. Itâ??s a cyclical indicator and should be viewed with a bit of a longer time horizon.
Another metric to gauge the recovery.
Corporation Income Tax Forecasts for FY 2010
â??For most states, corporate income tax collections represent a much smaller share of state tax revenues than other sources, on average representing almost 7 percent of the total. But in an environment where revenues are scarce, every source is important to the bottom line. More than half of the responding states expected these collections to decline.
* Twenty-three states anticipated that corporate income tax collection would drop below last year's levels, with 13 of these forecasting double-digit declines. The biggest drops were forecasted by Ohio (-80.8 percent), Delaware (-65 percent), Illinois (-33.8 percent) and Minnesota (-31.7 percent). Two other states expected declines greater than 20 percent: Louisiana (-29.5 percent) and Montana (-26.5 percent).
* Thirteen states and Puerto Rico estimated that corporate income tax collections would rise compared to last year. The biggest expected increases were reported by Wisconsin (16.6 percent), Oregon (13.4 percent), Puerto Rico (13 percent) and Idaho (12.8 percent). Wisconsin and Oregon were among the states that increased corporate taxes.â?
http://www.ncsl.org/?tabid=18858#CIT UN:F [1.8.3_1051] please wait... Rating: 0.0/5 (0 votes cast)
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What is the equation/ the variables for the ER ?
Thanks UN:F [1.8.3_1051] please wait... Rating: 1.0/5 (1 vote cast)
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However, thereâ??s been a consistent trend of analysts lowering their estimates as the quarters approach, allowing companies to â??beatâ? the revised lower estimatesâ?¦
That said, I agree with you TPC â?? weâ??re clearly in/approaching far more of a show-me phase, when companies and analysts wonâ??t (I hope!) be able to say thereâ??s a hockey stick in E coming next yearâ?¦
PS. Does your expectation ratio graph go back further in history? Iâ??d be curious as to what it looked like 07-08. UN:F [1.8.3_1051] please wait... Rating: 0.0/5 (0 votes cast)
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Commercial and Industrial loans are still sloping down (as of 25-Feb-10) â?? that doesnâ??t seem to correlate with a recovery. Therefore, profits are a short term bounce or at best a new operating base brought on by opex cuts and games with accts recv and payables. If we were recovering, I would expect some growth in commercial/industrial loans and insider buying as they see things improving. If there is no real growth but a new lower operating baseline â?? what happens with stock prices?
http://research.stlouisfed.org/publications/usfd/20100226/USFD_book.pdf UN:F [1.8.3_1051] please wait... Rating: 0.0/5 (0 votes cast)
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Earnings growth YoY for 2010 for S&P500 per your chart is projected to grow from 70% in q1 to 26% in q4. that does not seem to me to be unachievable, even with a slow growth in revenues (which you might assume will increase its rate of growth as, or if, the recovery lengthens). remember, the stimulus that was passed last year is going to be spent over a longer time than envisioned, likely into 2011, as such projects such as weatherproofing never got off the ground this winter (there is a story of bureaucratic inefficiency).
so i know this is your thesis for this year, but i think you are too negative here. UN:F [1.8.3_1051] please wait... Rating: 0.0/5 (0 votes cast)
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chris Reply:March 3rd, 2010 at 9:54 AM
just saw this re 2/10 ISM: http://www.bloomberg.com/apps/news?pid=20601087&sid=aWbgPNraMelE&pos=1 UN:F [1.8.3_1051] please wait... Rating: 0.0/5 (0 votes cast)
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DanH Reply:March 3rd, 2010 at 9:56 AM
Why are you so bullish Chris? Any actual fundamental reasons? Sounds to me like youâ??ve jumped on the bull bandwagon about 70% too late. UN:F [1.8.3_1051] please wait... Rating: 0.0/5 (0 votes cast)
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TPC Reply:March 3rd, 2010 at 10:03 AM
Iâ??d love to hear your bull thesis as well. My thinking coming into 2010 was that H1 would be relatively robust, but the market has gone almost nowhere.
Now weâ??re staring at global tightening, an end to the stimulus, record high ECRI readings, record high ISM data and back half earnings estimates that are lofty.
The time to get really aggressive was 12 months ago. Not today. UA:F [1.8.3_1051] please wait... Rating: 0.0/5 (0 votes cast)
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As the Q4 2009 earnings season comes to a close itâ??s important to take a look at the overall earnings picture. With over 98% of the S&P 500 reporting it looks like Q4 earnings will come in a little shy of $16.80. As we fully expected the analystâ??s estimates once again proved to be well below the mark as 72% of all companies outperformed expectations. This has resulted in substantial estimate increases and has been one of the primary reasons why we have maintained that investors could not short this market for the entirety of the last year. The earnings upgrade cycle has served as wind at the marketâ??s back, but the optimism is now becoming an impediment.
In the last year analysts have substantially contributed to the equity rally as they upgraded stocks and increased their estimates. The â??Monday upgradeâ? rally has become a hallmark of the move higher in stocks as analysts spend their weekends adjusting estimates and preparing for Monday morning upgrades and downgrades (though mostly upgrades). In just the last 8 weeks analystâ??s Q1 2010 estimates have jumped 4%. In addition, they are growing increasingly optimistic about the latter portion of the year (where I believe things get potentially messy). The H2 estimates have continued to creep higher as Q4 earnings were released. Analysts are now calling for $78 in operating earnings for FY 2010. The 2011 estimates have also surged. Analysts now expect $94 in operating earnings for 2011. That would represent back to back years of 20% earnings growth - something that has never happened before in the history of the United States equity market.
The real problems lie in the latter portion of 2010. Analysts are currently calling for 38% year over year growth for Q2, 30% year over year growth in Q3, and 27% growth in Q4 2010. Granted, these are coming off of easy comps, however, we have yet to see any real revenue growth. Including the very easy comps with financials, sales grew just 5% year over year in Q4. If we exclude the financials revenue growth was nearly non-existent at just 1.1% year over year. This is best visualized in the image below which shows the S&P 500 by revenue per share. The trough is clear, but there is certainly no v-shaped recovery here. At best, we are bumping along the bottom.
We are well into the economic recovery (ISM at 5 year highs and record highs in the ECRIâ??s leading indicators) and the ultimate L-shaped recovery remains in corporate revenues. The vast majority of the rebound in earnings is non-organic and unsustainable. Margins have expanded to pre-crisis highs as companies squeeze every last drop down to the bottom line. Analysts expect earnings to return to near 2007 levels without any real revenue growth. I find that hard to believe. If youâ??re still confused as to why insider buying is non-existent in this market look no further than the revenue line of corporate income statements.
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