About That Earnings Acceleration….

One aspect of this market that I’m starting to strongly doubt is the belief that earnings growth is about to ramp up. In other words, the rate of growth will itself increase.

The chart below shows the S&P 500 (blue line, left scale) along with its earnings (yellow line, right scale). The red line is Wall Street’s forecast (please note: it’s not my forecast, it’s Wall Street’s consensus). The lines are scaled at a ratio of 15-to-1 so whenever the lines cross, the P/E Ratio is exactly 15.


It’s that red line that has me concerned. Wall Street seems to believe it’s about to hook upward. Me? I’m not so sure. For one, profit margins have been pushed about as far as they can go. I can believe that nominal GDP growth will pick up, but nothing close to what would sustain a major bounce in corporate earnings.

The Street currently sees full-year earnings for the S&P 500 coming in at $111. That’s down from $117 ten months ago. Earnings growth was actually negative for Q3 and Q4 of 2012. Unless we see evidence of an earnings pickup for Q1 2013, I’m inclined to believe the market will earn $100 for all of 2013.

Is the yellow line going through a minor bump like it did in 1998, or is it hitting a major peak like 2000 and 2007? I should add that if the earnings projections are correct, the S&P 500 is very undervalued here.

Posted by on February 11th, 2013 at 2:28 pm

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