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Thursday, April 25, 2013

Earnings scorecard

Sometimes you wonder if fundamentals matter or not the way the market acts.  However, over the long term I believe they still apply.  Despite the market retesting its all time highs this week, the earnings reports are not doing well.  Lets look at some charts.


The ratio of negative-to-positive guidance has been above the long term average for four quarters now.  It may change some before this quarter is over, but it seems pretty likely to be at or above the data from last quarter.  Analysts still are expecting a big earnings rebound in the second half of the year.  Is that going to materialize?

Check out the earnings scorecard so far.  Source

There are only three quarters on the chart that had a beat rate on earnings this low.  All three of those instances happened during a recession.

There are only two quarters that had beat rates on revenue this low and of course those also came during a recession.

The global recession is clearly affecting earnings.  There are still quite a few companies to report so things could get some better.  However, at this point we have a pretty good representative sample so the changes are likely to be relatively minor.  I have not seen the revenue growth chart lately, but I heard a guy on TV say that so far revenue was down slightly.  That is going to be key because profit margins are way above historical norms.  That means any earnings growth from here will have to come through revenue growth.  Will that happen this year?  Every year since 2009 we have had a mid year slow down.  The global economy is the weakest it has been at this time of year.  What happens if we slow down again like we have been?  There are quite a few signs that is happening once again.

Yesterday afternoon the guy on Bloomberg TV kept telling me that it was all about earnings whenever he reported on what the market was doing.  As I look at the above charts I would say the current rally is most definitely not about earnings.  This looks like it will be the worst earnings season since 2008.  Many companies are guiding down for the future on top of it.   Many tech stocks are getting crushed on their earnings reports.  It is going to take some brave investors to push prices into new all time highs and above.  I guess we will see if they exist or not.


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