Tuesday, 12 March 2013

US corporate earnings losing momentum

Despite the recent rally in the US stock market, Business Insider reports that Gluskin Sheff's chief economist David Rosenberg sees corporate earnings falling.

If contraction and recession are synonymous, then an earnings recession is already underway... [A]t last count, S&P 500 Q4 operating EPS is running at -1.7% on a YoY basis, and at a $23.32 estimate right now for last quarter, it is actually running only moderately above the level prevailing in Q4 2006 ($21.99)...

John Hussman is probably not surprised at this. In his latest commentary, Hussman says that elevated corporate profits have been the result of massive government deficit and depressed household savings but this may be reversing.

Notice that elevated profit margins are also strongly mean-reverting over the economic cycle. In general, elevated profit margins are associated with weak profit growth over the following 4-year period. The historical norm for corporate profits is about 6% of GDP. The present level is about 70% above that, and can be expected to be followed by a contraction in corporate profits over the coming 4-year period, at a roughly 12% annual rate. This will be a surprise. It should not be a surprise.

Hussman adds that the historical norm for the sum of government and household saving as a percent of GDP is about 4 percent. At present, the sum is a negative 5 percent of GDP. A return to the historical norm could trigger a decline in corporate earnings.

Notice that over the past three years, we’ve seen a very slight improvement in the sum of government and personal savings as a fraction of GDP... Accordingly, though corporate profits are still extraordinarily elevated, we have also observed a significant decline of earnings momentum in recent quarters. This is not some temporary anomaly. It should be clear from the previous chart that the normalization of government and household savings is just getting started.

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