Welcome back to Blogger’s Take: Each week, we ask a timely and relevant question, and post a paragrpah or three from our pool of bloggers.
Today’s question is on Earnings: What might we expect from this Earnings season — good, bad, or indifferent? Is this a particularly important Q, or is this merely another Quarter? Should we be looking for anything special?
Here’s the answers:
Discussions on earnings are always challenging, in that time frame plays an important role. In the longer term we have discussed the importance of currently record high profit margins have had
on robust earnings growth. The evolution of earnings over the long term will depend a great deal on how profit margins evolve. Over the short term, another issue springs to mind. For instance, how
the source of potential earnings growth is going to shift from once-hot sectors
like energy to other sectors. Tom Petruno in the Los
Angeles Times discusses this mix shift, and Pui-Wing Tam in the Wall Street Journal focuses on heightened earnings expectations for the technology sector in 2007. If other sectors are not able to pick up the slack from the once-highflying energy sector, disappointing headline earnings numbers may be waiting. The bottom line seems to be that investors need to look behind the headline numbers to the sources of earnings in the New Year. Then again, isn’t that always the case?
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A good economy and in particular falling oil prices should help push earnings
higher. I expect the earnings season to be a good one, but not one that has any
undue significance. I think investors at the moment are going to pay more
attention to inflation indicators, consumer sentiment, and real estate price
* * *
Do earnings for the Q4, 2006 matter to the market? I think we are fairly late in the stock market cycle. If this is correct I tend to take
that to mean that a good earnings season won°òt really help the market do any
better than it has been going for the last few months, meaning a good season
won’t accelerate gains. I do think that a bad earnings season has the ability to
trigger a normal 10% market correction.
If you read Barry’s site regularly you are in touch with the length of time since the last 10% correction and the last 2% single day decline.
The market will have both of these at some point again (even if we can’t time it
correctly) and earnings perceived as weak could be the catalyst.
* * *
I’m afraid I have some bad news to report—the profit party is coming to an end. Now I realize some of you may have missed it. Actually, if
you’re a worker, I’m pretty darn sure you missed it. But damn, what a party. Since
the third quarter of 2001, the economy has grown by 31% (in nominal terms). Not
bad. But corporate profits? Hold your hat. Up 132%. Now that’s growth! Corporate
profits now represent the largest share of the economy in over 50 years.
But all that’s coming to an end. A year ago, fourth-quarter profit growth was pegged at 15%. Not anymore. For the first time in 19
quarters, the operating earnings growth of the S&P 500 will come in below
10%. But promise me you won’t tell anyone on Planet
Wall Street. The Dow recently hit at a new all-time high (again) and I wouldn’t
want anything frightening it (facts, reality, etc.).
The picture is even bleaker than the surface is telling us. For example, insurance companies are experiencing out-sized
gains this year to thanks to a light-hurricane season combined heavy losses
last year from Katrina.
Lower energy prices are taking a toll on energy stocks. That sector is expected to report an earnings decline of
5.8%. The outlook is particular rough for the tech sector. Tech stocks are
looking at their second straight quarter of lower earnings. Plus, we’ve seen
profit warnings from once-shining stars like Advanced Micro Devices (AMD), Xilinx (XLNX) and Texas Instruments (TXN). Poor
Intel (INTC). That stock is basically where it was ten years ago (way back when Andy Grove was Time’s “Man of the Year”).
But all is not lost. Earnings growth may merely be leveling off instead of plunging into the abyss. Consider
that one-fourth of the S&P 500’s profits come from outside the U.S. That’s a
big change from years past. Also, there are bright spots here and there. For
example, Guess (GES) just raised its fourth-quarter earnings forecast about 40% higher.
The good earnings are out there. You just have to look a little harder to find them.
* * *
The answer to earnings growth is 42.
Earnings will good, but liquidity has made expectations darn hard to beat. All baked in.
Earnings don’t become important to the second and third quarter of 2007. Not before or after.
Seems to me the Fed has few options. If inflation is really running at 3.5%, and that’s what I see in my universe, they need to raise rates. If the economy is slowing down, and the data and earnings seem to point that way, they need to lower rates.
If they get it wrong and lower to much or to quickly, commodities priced in dollars go to the moon.
The Fed doesn’t have any good options.