If analysts get it exactly right, revenues from the S&P 500 (^GSPC) will grow just 0.3% this earnings season. Even the typically fast-growing tech sector, which leads all of its peers in sales growth projections, is only pegged to deliver fourth quarter revenue gains of 4.4% according to FactSet data.
While this slow-to-no sales growth story has been plaguing Wall Street for the past few years, it clearly hasn’t hindered the performance of the market which is within inches of a record high. At least not yet warns Nick Colas, the chief market strategist at ConvergEx Group, in the attached video, who says top-line growth is critical to “creating the long-term earnings growth needed to propel stocks higher.”
“If you cut your costs enough, flat revenues can still create earnings growth but that’s really a game that has to come to an end,” Colas says. “You can’t cut (costs) to zero, so ultimately you’ve got to grow that top line.”
As Colas recounts, the original pony car almost didn’t make it into production. But thanks to the persistence and influence of Lee Iacocca, it did, and went on to be a huge hit and one of Ford’s biggest profit generators.
“It’s a classic story about how product drives revenue growth, drives profit growth,” Colas says, pointing out that the average customer ordered $1000 worth of options for their new Mustang, which only had a $2400 base price.
“The margin on options was 60-70%, so it was a huge profit generator,” Colas says, using the example of the Mustang as a reminder of how important it is to creating revenue growth.
“The big takeaway is we’ve got to get more revenue growth from stocks in 2014,” he says. “We didn’t get much in 2013 but the PE multiple still expanded. We’ve got to earn that multiple expansion this year… or else” he says.
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