Companies Are Guiding Lower

The Wall Street Journal reports today that corporations are cutting guidance at the fastest rate since 2009. That’s one of the those headlines that strikes you as sounding terrible, but as you give it more thought, it’s not nearly as dire as it sounds. Of course, once every three years there’s going to be the worst something in the last three years.

Also, we’re talking the second derivative here. Companies are still earning money, and profits are still growing. The difference is that the rate of growth is slowing.

Fifty-eight companies have released estimates for first-quarter earnings that fall below analyst consensus, compared with 23 that beat Wall Street. That’s the largest ratio of negative to positive announcements since the first quarter of 2009, when the S&P 500 was on its way to bottoming out below 700 in early March.

“We’re seeing more negative guidance than usual,” said Greg Harrison, earnings analyst with Thomson Reuters. Estimated profits for 2012 have steadily fallen since October. The average S&P 500 company currently expects to add 8.3% in profits for the year. Just over a month ago, that estimate was at 10%.

This is an extension of what I mentioned in last week’s CWS Market Review: profit margins have gone as far as they can go. You can cut expenses to boost profits, but that game isn’t a long-term plan.

At some point, you need to bring in more revenue. Since companies can’t do much about raising prices in this environment, they need to sell more widgets. That means more customers, and that means more jobs.

Today’s jobless claims (351,000, a four-year low) was more good news for workers — and equities.

Posted by on February 23rd, 2012 at 9:00 am


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