Earnings – not what they seem?
With the second-quarter earnings season in the US in full swing, the expected year-on-year trend in S&P 500 earnings has improved from -35.7% to -35.2%. Big deal, you may think. And yet, investors have been propelling the stock market higher on being pleased with the earnings reports (albeit only beating low estimates). The Dow Jones Industrial Index yesterday breached 9,000 for the first time since January and the Nasdaq Composite Index notched up a 12th consecutive advancing day.
While the earnings announcements thus far have been impressive at the headline level, the reports become less striking once one digs a bit deeper to discover that the earnings numbers often only beat estimates due to cost-cutting. And, at the top line revenues are still deflating, indicating no pricing power.
Chart of the Day provides some perspective on the current earnings environment by highlighting how 12-month “as reported” earnings are expected (38% of S&P 500 companies have reported for Q2 2009) to have declined over 98% since peaking in Q3 2007. This makes it by far the largest decline on record (the data goes back to 1936). “In fact, real earnings have dropped to a record low and if current estimates hold, Q3 2009 will see the first 12-month period during which S&P 500 earnings are negative,” said Chart of the Day. This provides a sobering picture indeed, causing concern that in a number of instances a disparity is developing between stock prices and fundamental reality.
Source: Chart of the Day, July 24, 2009.
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