Tag Archives: Corporate profits

Global Stock Prices Fueled by Ugly Earnings, by Wolf Richter

The stock market is capitalizing faith, hope, and pixie dust. From Wolf Richter at wolfstreet.com:

Hype works, until it doesn’t.

In theory, stock markets surge because earnings are rising or are expected to rise. But the astounding thing in this eight-year bull market is the combination of how far stocks have surged since 2011 and how lousy earnings have been – globally!

I’ve been pointing this out for US equities, but this is a global thing, with global implications, and of global magnitude, and on that level, it’s even grander and more astounding.

Global stocks, as measured by the MSCI AC, which tracks equity returns in 23 developed and 24 emerging markets, has soared over 11% year-to-date and is up 32% since pre-Financial-Crisis peak-year 2007. Some components within it:

  • The MSCI US, reflecting US equities, is up 11.5% year-to-date and 75% since 2007.
  • The MSCI EM for Emerging Markets surged 23% this year and is up 45% since 2007.
  • Even the MSCI EU for European equities is above its level in 2007.

This chart by Economics and Strategy, National Bank of Canada, shows the increase of the MSCI indices for the US (brown line), Emerging Markets (red line), the World (blue line) and the EU (teal line at the bottom). The left scale is set at 2007 =100. So when the MSCI US is at 175 on the left scale, it has surged 75% from 2007:

So you’d think that these surging stock prices would be based on surging corporate earnings, that companies are raking in profits hand over fist, and that financial engineering, “adjustments,” and share buybacks are making these earnings looks even fatter and grander.

And you’d think the “estimated forward earnings” would be booming. There are what analysts and corporate PR departments put out to be their hope for future “adjusted earnings,” which are then massively slashed as earnings reporting dates move closer so that “adjusted earnings” have a chance of beating the lowered estimates. These “adjusted earnings” are earnings as reported under GAAP minus a ton of bad stuff “adjusted” out of them. They contrast with GAAP earnings.

To continue reading: Global Stock Prices Fueled by Ugly Earnings


Stock Market Warning Siren is Blaring, by Wolf Richter

Stop us if you’ve heard this one: the stock market is massively overvalued. Well, it is overvalued, and Wolf Richter got the stats and charts to prove it. From Richter at wolfstreet.com:

Are we blinded yet by the brilliance of corporate earnings?

“Adjusted” earnings growth is 10.2% year-over-year in the second quarter, according to FactSet, based on the 91% of the companies in the S&P 500 that have reported results. The energy sector was a key driver, with 332% “adjusted” earnings growth from the oil-bust levels of a year ago.

The sectors with double-digit earnings growth: information technology (14.7%), utilities (10.8%), and financials (10.3%). The rest were single digit. Earnings in the consumer discretionary sector declined.

Revenues grew 5.1%, also led by the energy sector. At the beginning of Q2 last year, the WTI grade of crude oil traded at $35 a barrel. In Q2 this year, WTI ranged from $42 to $53 a barrel.

So the Wall-Street hype machine is cranking at maximum RPM to propagate the great news that earnings are soaring, and that this is the reason why stocks should also be soaring, and forget everything else. The hype machine carefully avoids showing the bigger picture which is dismal for earnings and ludicrous for stock valuations.

Aggregate earnings per share (EPS) for the S&P 500 companies on a trailing 12-months basis rose for the second quarter in a row. That’s the foundation of the Wall Street hype. But here’s the thing with these EPS: they’re now back where they had been in… May 2014.

Yep. More than three years of earnings stagnation. No growth whatsoever, even for “adjusted” earnings. In fact, on a trailing 12-month basis, aggregate EPS of the S&P 500 companies are down about 5% from their peak in Q4 2014. And yet, over the same three-plus years of total earnings stagnation, the S&P 500 index has soared 34%.

This chart shows those “adjusted” earnings per share for the S&P 500 companies (black line) and the S&P 500 index (blue line). Chart via FactSet (click to enlarge). I marked August 2012 as the point five years ago, and May 2014:

And these are not earnings under the Generally Accepted Accounting Principles (GAAP). FactSet uses “adjusted” earnings for its analyses. These are the earnings with the bad stuff “adjusted” out of them by management to manipulate earnings into the most favorable light. Not all companies report “adjusted” earnings. Some only report GAAP earnings and live with the consequences. But others put adjusted earnings into the foreground, and that’s what Wall Street dishes up.

To continue reading: Stock Market Warning Siren is Blaring

This is Worse than Before the Last Three Crashes, by Wolf Richter

Investors are paying historically high prices for corporate profits. From Wolf Richter at wolfstreet.com:

This chart shows “multiple compression” is coming.

How long can this surge in stocks go on? That’s what everyone wants to know. Projections range from “forever” – these projections have become increasingly common – to “it’s already finished.” That’s a fairly wide range.

Everyone has their own reasons for their boundless optimism or their doom-and-gloom outlooks. But there are some factors – boundless optimists should push them aside assiduously – that, from a historical point of view, would trigger tsunami sirens. Because in the end, it’s not different this time. And the cycle of “multiple expansion” and “multiple compression” is one of those factors.

For example, a stock trades at a price that gives it a P/E ratio of 20 (stock price is 20 times earnings per share). When earnings per share remain flat over time, but the stock price rises, then the P/E ratio (the multiple) expands. When this spreads across the market, even when aggregate earnings remain flat, it means “rally.”

And earnings have been flat since 2011! The other day, I posted a chart that showed that earnings of the S&P 500 companies in Q4 2016 were back where they’d been in Q4 2011. So five years of earnings stagnation. Yet, during those five years, the S&P 500 index soared 87% [read… S&P 500 Earnings Stuck at 2011 Levels, Stocks up 87% Since].

The thing that changed during those five years was the P/E ratio. This combination of flat earnings and soaring stock prices, and thus soaring P/E ratios, is, historically speaking, not a good thing when it drags on for too long. This chart shows the S&P 500 P/E ratios on every January 1 of the year. This aggregate P/E ratio has nearly doubled from 14.9 on January 1, 2012, to 26.7 on March 3, 2017:

To continue reading: This is Worse than Before the Last Three Crashes

A Flood Of Profit Warnings Just Crushed The “Earnings Recovery” by Tyler Durden

The “hockey stick” is Zero Hedge’s term for the never ending game Wall Street analysts play of projecting a sharp rise in earnings—right around the corner next quarter—off of flat or declining earnings now. The hockey stick never seems to materialize, but that doesn’t stop the analysts. From Tyler Durden at zerohedge.com:

After what is set to be six consecutive quarters of annual earnings declines – consensus now sees Q3 EPS dropping -2.1% according to Facset when as recently as the end of March, analysts were expecting EPS growth of 3.2% for the quarter – Wall Street has decided that it will take no more of this negativism, and expects S&P500 earnings to soar in the half, as shown in the following Deutsche Bank chart.

There is just one problem: contrary to the cheerful narrative of an earnings recovery, companies have been slashing H2 earnings, and as MarketWatch reports, at least 10 companies this week alone have lowered outlooks for the second half of the year.

Indeed, as we have been warning for months, and as Jeff Gundlach cautioned on his presentation last night…

… the EPS “hockeystick” has been once again indefinitely postponed; in fact what happens next will be a steep drop in forward EPS.

MW admits as much, saying that “Investors expecting the earnings picture to improve significantly in the year’s second half may want to keep an eye on a wave of sales and profit warnings from some large- and small-cap companies this week.” Some examples: Ford Motor, Barnes & Noble, Tractor Supply, SuperValu, Sprout’s Farmers Market, Pier 1 Imports, General Mills, HD Supply Holdings, EnQuest and Dave & Buster’s are among the companies tempering expectations for their second half.

So far, the flood of negative earnings warnings has not moved the needle on expectations for the third quarter, according to FactSet. But it wil: 78 of the 113 S&P 500 companies that have provided an outlook for the quarter have issued negative earnings-per-share guidance, according to FactSet senior analyst John Butters.

This number is set to surge for one simple reason: regular readers are quite familiar with what the latest “scapegoat” is – it is shown in the photo below.

As we said on August 31, when we first reported about Hanjin’s bankruptcy, we said that “the global implications from the bankruptcy are unknown: if, as expected, the company’s ships remain “frozen” and inaccessible for weeks if not months, the impact on global supply chains will be devastating, potentially resulting in a cascading waterfall effect, whose impact on global economies could be severe as a result of the worldwide logistics chaos. The good news is that both economists and corporations around the globe, both those impacted and others, will now have yet another excuse on which to blame the “unexpected” slowdown in both profits and economic growth in the third quarter.”

Lo and behold, this is precisely what is about to take place, cue MarketWatch this morning:

The negative outlooks provided this week reflect a range of issues facing companies, some of which have emerged only recently.

For retailers, the bankruptcy of South Korea’s biggest shipping line and the world’s seventh biggest as measured by capacity, Hanjin Shipping, is a big risk, as it has left cargo valued at $14 billion stranded at sea, as the Wall Street Journal reported Wednesday. That’s because ships carrying its containers have been denied access to ports, or even been seized by some of the company’s creditors.

Coming right before the holiday season, that is likely to hurt a range of companies. Fashion-driven specialty retailers and clothing retailers making significant fashion shifts are most at risk from the Hanjin-related havoc, according to Cowen & Co. analysts. They name names, including Ascena Retail Group, Abercrombie & Fitch, American Eagle, Urban Outfitters, Gap, Michael Kors and Coach.

To continue reading: A Flood Of Profit Warnings Just Crushed The “Earnings Recovery”

First-Quarter Earnings Are Now Expected to Really Suck, by Wolf Richter

From Wolf Richter at wolfstreet.com:

Declines not seen since the Financial Crisis.

With the first quarter done, the bean-counting begins. One thing is clear: Wall Street is now furiously trying to contain the damage.

Even analysts who estimate pro-forma, ex-bad-items, non-GAAP earnings that S&P 500 companies propagate to look better and that these analysts use to inflate their stock-price targets, just threw in the towel on the quarter.

They expect these inflated earnings per share for the first quarter to plunge 8.5% from a year ago, according to FactSet. If this holds after S&P 500 companies report their ex-bad-items earnings, it would be the worst EPS decline since Q3 2009.

It would also be the fourth quarter in a row of year-over-year earnings declines, a phenomenon that last happened during the Great Recession from Q4 2008 through Q3 2009.

These ex-bad-items earnings are always far better than the still beautified earnings reported under GAAP, which, given these trends, may be too ugly to behold.

And analysts’ earnings estimates always decline in the months leading up to the very days that companies report their earnings. By this strategy, analysts lower their over-optimistic ex-bad-items forecasts of earnings per share — after they used them to pump up their share-price targets – to something companies can actually beat. And Q1 is going to be tough.

So far, 121 companies have issued EPS guidance for the first quarter. Of them, 94 have slashed their EPS outlook and 27 have raised it. If no additional negative guidance appears, it would, according to FactSet, “mark the second highest number of S&P 500 companies issuing negative EPS guidance for a quarter since FactSet began tracking the data in 2006.”

To continue reading: First-Quarter Earnings Are Now Expected to Really Suck

We May Have Just Witnessed A Generational Peak In Corporate Profit Margins, by Jess Felder

From Jesse Felder at thefelderreport.com:

Over the past few years I’ve written a fair amount about the record-high levels of corporate profit margins. I’ve been focused on this topic because corporate earnings are one of the most popular ways to value equities thus the sustainability of record-high profit margins should be an issue of great concern to investors. If profit margins revert to historical averages, earnings-based valuation measures investors are using to justify investment in equities today could quickly go against them making stocks appear much more expensive than they do currently. And this process may now be underway.

To the point of mean reversion in profit margins, in the past I have referenced the words of a pair of investment legends. Jeremy Grantham has called profit margins, “the most mean-reverting series in finance.” And back in 1999, Warren Buffett explained why:

In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%. One thing keeping the percentage down will be competition, which is alive and well. In addition, there’s a public-policy point: If corporate investors, in aggregate, are going to eat an ever-growing portion of the American economic pie, some other group will have to settle for a smaller portion. That would justifiably raise political problems—and in my view a major reslicing of the pie just isn’t going to happen.

Both of these two gentlemen clearly believe, and very strongly, that corporate profit margins have an equilibrium. They can rise above or fall below that equilibrium but the very nature of capitalism, along with its social contract, will force an inevitable reversion to the mean.

To continue reading: We May Have Just Witnessed A Generational Peak In Corporate Profit Margins

Worst Revenue & Earnings Declines Since Crisis Year 2009, by Wolf Richter

Earnings? We don’t need no stinking earnings! From Wolf Richter, at wolf street.com:

Stocks have soared. But despite maxed-out financial engineering and ceaseless Wall-Street hype, the first half is shaping up to be tough.

Week after week, corporations and analysts have been whittling down their estimates. By now, revenues of the S&P 500 companies are expected to decline 2.8% in Q1 from a year ago – the worst year-over-year decline since Q3 of crisis year 2009.

But the unstoppable healthcare sector is expected to see revenue growth of 9.1%, according to FactSet, with three sub-sectors seeing double-digit sales growth: Healthcare Technology (38%), Biotechnology (23%), and Health Care Providers & Services (11%).

That’s why no one in Congress, or anywhere else, wants to get healthcare expenditures under control. It may eat up Medicare, Medicaid, state healthcare programs, and retiree healthcare programs. It may be economically cannibalistic for the country. It may bankrupt municipalities and states. It may blow up federal programs. But in its manner, healthcare is the most vibrant growth sector in the US economy. Even if it lives on borrowed money and is bankrupting the nation, it’s growth!