The End of the Streak

No, not Bill Miller’s streak.

As we mentioned back in February, the end of 18 consecutive quarters of double digit year over year gains in the S&P500 earnings has arrived. Not that double digits are magically meaningful — growth still exists, its just at decreased levels, and decelerating.

Indeed, the overall profit picture is likely to continue worsening. This has significant economic and  market implications (especially to those followers of the Fed Model).

With the consumer running out of financing options, and businesses too skittish to spend aggressively, its not too difficult to see how this can keep trending lower. 

Here’s the statement on Q4 2006 operating earnings via Standard & Poor’s:

"Fourth quarter 2006 operating earnings for the S&P 500 increased 8.9% over the fourth quarter 2005, marking the first time that the index has failed to post double-digit earnings growth since the first quarter of 2002, eighteen quarters ago.

Fourth quarter operating earnings were finalized at $21.99 per share, compared to $20.19 in the fourth quarter of 2005.  For the year, the index posted record earnings of $87.72 versus $76.45 for 2005, or a 14.7% gain compared to a 13.0% gain in 2005. 

According to Standard & Poor’s, sector performance varied significantly.  Materials surged 47% for the quarter, partially due to a depressed Q4 2005 comparison, and Energy, with lower oil prices and harder compressions to their Q4 2005 earnings, reported a 5.8% decline.  For the year, all ten sectors were positive with seven reporting double-digit gains.  Information Technology, whose earnings were down in both the second (-2.66%) and fourth quarter (-2.80%), reported a 1.3% gain for the year.

BusinessWeek got melancholy with the news:

"Here’s a funeral oration that may bring a small tear to the eye of Wall
Street pro and individual investor alike. "Today we lay to rest our
friend Mr. Double Digit. He was a steadfast ally of investors for a
number of years, and perhaps it can be said that we took him for
granted as he continued his winning ways. True, he enjoyed robust
health up to the very end of his life. But alas, today he goes to his
final rest after 18 consecutive quarters of reliably exceeding that
magical 10% figure we seem to fixate on. He’ll always hold two places
in our hearts."

Here’s the S&P data for 2006 versus 2005:


Their forecasts for 2007 expects year over year data to come in as follows:

Q1. . . . .    Q2. . . . .    Q3 . . . . .  Q4 . . . .   2007
4.96%. . . . 5.80%. . .  .2.90% . . .14.64% . . . 7.06%


S&P 500 Indices
Monthly and Annual returns S&P 500 Earnings and Estimates

R.I.P., Double-Digit Earnings Growth
Businessweek, April 3, 2007, 4:30PM EST

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What's been said:

Discussions found on the web:
  1. Michael Schumacher commented on Apr 5

    And unfortunately all of that will continue to not matter. Since we’re challenging new highs on the dow, virtually everyday now….and information that trillions of dollars of capital are invested, sorry traded, on are irrelavent because they are percieved as negative. New Home sales #’s with a +/-of error of 15% is worth over a hundy on the DJIA while real numbers like anything that is not provided by the NAR is rubbished.

    Did Fox News take over the analysis of all economic indicators?? Sure seems like it to me.


  2. Barry Ritholtz commented on Apr 5

    Momentum is a prime mover of stocks

    Trends tend to stay in place until disrupted

  3. S commented on Apr 5

    Don’t you love it that companies started expensing stock options to show their dilutive effect is a cost to existing shareholders, but S&P conveniently ignores it.

  4. Michael Schumacher commented on Apr 5


    As someone who has learned a great deal reading this site I find it fairly ironic that the examples that you post illicit comments from a wide variety of people and should give you a fairly large swath to participate in those arguements…. simply saying “momo is king” when placed in context to the articles you are referencing is where I find it a bit condescending

    I think people are looking for a little more than “It is what it is”……since there are hundreds or thousands of people that write an article and do not really take a position or arguement but then point to that same article and say “look I was correct” when they never took a definitive postion to begin with. You have a position and present it with well-placed thought and facts that are backed up by research. That is why the above comments of “trend is your friend” etc is quite different from your usual approach.

    Did I miss something here or read too much into the above.


  5. spencer commented on Apr 5

    Adam — I have used S&P operating eps to calculate the p/e for years largely because most investor use operating eps when dealing with individual stocks. This PE has worked well for me.

    If you do this be sure and build the two-three month reporting lag into your calculations.

  6. Mike M commented on Apr 5


    Operating earnings are an utter joke. Using OE for analysis of an index is doubly bad. OE are what a company makes after you take out all the bad stuff that happened that quarter. The problem is, bad stuff happens every quarter (especially to an index of stocks like SP500). Use reported earnings, trailing. This is the money for shareholders. Don’t believe the hype!

  7. sonoma commented on Apr 5

    Yes Barry, but stocks keep going up and up and up.

    The Feb/March correction discounted the Q1-Q3 earnings slowdown. Now, the market is looking forward to year-end 2007 and 2008 when earnings will once again re-accelerate.

    The uptrend will stay in place until mid-summer 2008, when a Dem sweep becomes obvious. At that point, look out below because taxes and trade barriers are going way up, and a diminution of US role as global cop will put stress on global trade and emerging market growth models.

  8. Fred commented on Apr 5

    Yes…this record has gone down. Yet many don’t realize that a slowing growth rate is not a death knell for stocks. See Tickersense’s comments on the same:

    “While the 18 consecutive quarters of double digit growth is the longest streak of its kind, there was a 13 consecutive quarter streak from 1992 to 1995. Once that streak ended, growth remained low for the next couple of years, but it did not seem to negatively affect the markets.”

    Yes…we’re back with ANOTHER rhyme with 1995.

  9. wally commented on Apr 5

    Momo is king.

  10. Fred commented on Apr 5

    That’s just the way it is…

  11. Adam commented on Apr 5

    By my calculations, the current P/7-yr moving average of real operating earnings is 21.93 for the S&P 500. This is well above the 15-20 range suggested by Benjamin Graham as suitable for equity investment.

    Looking back, the last two year ends when this figure was within the 15-20 range were 12/31/02 and 12/31/04. Not surprisingly, those turned out to be outstanding times to be pouring money into equities.

    For more interesting reading on this valuation calculation as a good measure of future (10 year) expected return, read Robert Shiller’s “Valuation ratios and the long-run stock market outlook”.

  12. Macro Man commented on Apr 5

    The end of 2004 was an outstanding time to pour money into US equities? The S&P 500 returned less than 5%, including dividends, in 2005.

  13. skateman commented on Apr 5

    With margins at all time highs, profit growth can’t greatly exceed NGDP going forward unless margins expand even further. Sure you might get a little push from share buybacks or faster foreign growth, but even a slight contraction in margins would erase all that. I’m sympathetic to the notion that the mean profit margin is now higher than the historic average, but you’ve got to be a determined optimist to think we’re not currently above the new mean. So we’re looking at future profit growth of say, 5-6%. If the P/E of the S&P 500 remains at 17, which is reasonable, that will be your return plus 1.81% in dividends. That’s not end of the world stuff, just reality.

  14. Adam commented on Apr 5

    Macro Man:

    “The end of 2004 was an outstanding time to pour money into US equities? The S&P 500 returned less than 5%, including dividends, in 2005.”

    Thank you for pointing out my mistake. That should have read:

    “Looking back, the last two year ends when this figure was within the 15-20 range were 12/31/02 and 12/31/94. Not surprisingly, those turned out to be outstanding times to be pouring money into equities.”

  15. Adam commented on Apr 5

    Macro Man:

    I should also mention that, when I say “outstanding times to be pouring money into equities”, I do not base that opinion on the 1 year return for that year, but rather, on the CAGR from that time until now.

  16. alexd commented on Apr 5

    If I recall correctly a little while back Barry had put up a chart that in a general manner indicated what type of investments do well in a particular part of the given economic cycle. The answer of the type of environment leans towards growth.

    If more and more companies are reporting slowing earnings the ones that show increasing sales and earnings are likely to be highly valued and pursued. If we were to get a recession and a reaction from the fed that included lowering the interest rates that would probably increase the value of companies with expanding earnings.

    As far as momentum goes yes it is the most important aspect of stock price. No matter how you play the game in terms of time, or direction of your bet, it is logically desirable to want to bet on something that makes you money. Of course there are those, who play off the possible lack of volatility in an issue but that is the exception rather than the rule.

    Napoleon was supposedly looking for a general and asked one of his aids the following about the candidate: “Is he lucky?” Not withstanding the dubious value of superstition people prefer trends.

    Yes I know, I know the trend is your friend until its dog “crash” bites us in the butt, but for those who play it well it is fine. Let’s not forget that Mark Cuban sold his internet company at the top and then parlayed his investments with accuracy. Not everyone had a horror story about the last few years of the previous century.

    The problem is being the last one at the party.

  17. Estragon commented on Apr 5

    Skateman – I generally agree with your view, but would point out a couple of ways margins could be maintained or expanded for a while yet.

    First, productivity could pick back up. IMV, this is unlikely as there is no apparent analog to tech in the late 90’s.

    Second, the USD may continue lower. If so, import replacement margins may expand, as may foreign affiliate earnings in USD terms. I see this as entirely plausible.

    I’m uncertain of the affect of the second possibility on US equities though. In the end, the result might be P/E contraction and flat prices, as (private) foreign fund flows go into a self-reinforcing decline.

  18. m3 commented on Apr 5

    “Q1. … . . . Q2. . . . . Q3 . …. . . . Q4 . …. . . . . 2007..
    4.96%. . . . 5.80%. . . .2.90% . . .14.64% . . . 7.06%”

    uh, am i reading this right? we’re supposed to go from 2.9% growth to 14.64% growth in one quarter?

    either last year’s holiday season was a lot worse than i thought, or margins are going to have to skyrocket, or the economy (and interest rates) is going to crater in Q3 PDQ…

    i don’t get that forecast at all.

  19. ManhattanGuy commented on Apr 5

    Everytime these bears say something negative about the overall market condition, I feel like I want to go buy more stocks. Look at the major market indexes, they are continue to rock.

    Barry – I hope you are not short in this market:)

  20. jack commented on Apr 5

    Lets see, for a few last years, market contracted between april and may (2000, 2002, 2004, 2005). January-March bring record high fund inflows. It usually slows after mid April. Why would this year be different?

  21. Cassandra commented on Apr 5

    Similar to Fidelity’s Magellan (evidenced by Miller Risk Advisor’s recen t research), one would be forgiven for conjecturing that LeggMason & Mr Miller’s behemoth had also become more or less un-manageable and had (one might assert) embarked down the rather ignominimous path towards less-than-salubrious ramping of large holdings into performance measurement calendar-year ends, ostensibly to goose performance. Now, one might say…”sure, so what, everyone falls victim to the agent vs. principal dilemma.” Yet, I would suggest that once embarked, there is no coming back. The hole, so dug, is too deep to claw back performance borrowed from the future in a market where every automated execution agent is hair triggered to find your order and front run it. So R.I.P. Mr MIller, Legg Mason Value, LMVFX, not that (as Alec Baldwin said to Anthony Hopkin’s character in “The Edge”) anyone should feel sorry for a man with his own plane….

  22. Frankie commented on Apr 7

    Well check out his latest fund of choice — LM opportunity Fund…can go short. leverage long, etc. Beta baby!

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