In a twist on the old saying, sometimes you miss the trees for the forest. The forest in this case is a tangled, dense, thorny jungle of misery called the American economy. Forget the concept of a double-dip; the economy is coming off about a year of negligible growth and tipping directly into another recession. The ISM reported Monday was 50.9, down from over 60 has recently as March. GDP is flat-lining and being revised lower. Practically speaking America is in a recession already. Period.
But rising above the tangled economic mess are majestic trees of earnings. It's not your imagination, corporations are handily beating expectations at a rate even greater than the standard "better than expectations" sandbagging. What's more the companies actually are beating with revenues rather than the recent trend of hitting the number by kicking workers out of the building.
I didn't believe it myself until I was joined by John Butters, the Senior Earnings Analyst from FactSet. With roughly 2/3 of the S&P500 having reported Butters has cut into the data. Frankly if you saw the figures in a vacuum you'd have to be impressed:
* 78% of companies reporting have beaten EPS estimates
* 73% of have beaten revenue estimates
* Earnings and revenue have been growing at roughly the same rate
* 45 companies have lowered estimates while 25 have raised guidance
I pushed on the idea of revenue growth. The top-line is becoming more critical than ever for traders. Corporate margins are at an all-time high and payrolls are shrinking, the implication being that companies have been trying to save their way into prosperity. Not according to Butters. "Blended growth rates of both earnings and revenues are coming in about the same at 11%," he says. In other words margins are staying strong but companies aren't necessarily coming about their earnings by ripping out staff.
The strongest reports have come out of Technology followed by Consumer Staples and Discretionary. Yup, even with unemployment at 9.2% and growing, the American consumer has an unquenchable thirst for stuff at any price. For the most part, companies have been able to pass their higher costs onto consumers. Sort of surprising news to those of us teaching their kids to hop on trains like hobos; a cost-effective offset to rising gas prices.
If you want caveats and qualifiers to this data you've come to the right place. How about these:
* The standards for corporate accounting are a joke
* The vast majority of revenue growth is coming from multinational benefiting from a plunging dollar
* Corporate earnings are trailing and not reflective of the rapidly rolling over nature of the current economy
* Companies always beat because they always sandbag
* The number of guide-downs would be higher if corporations had any clarity whatsoever ("We're not sure" isn't quantifiable but it has been a theme)
*Corporations, like the people who run them, are always the most optimistic at the top.
All of the above are true to an extent, particularly the point about revenues and multinational's growth. Regardless of the smoke, mirrors, and caveats the fact remains: Earnings growth is strong. You can't make a bullish thesis out of strong numbers but it's hard to short with the numbers blowing in your bearish face. Earnings are why the market continues to look cheap if you pull them out of the context of the forest of misery that is our economic world.
The tree of earnings perhaps shouldn't be growing, yet it is. Do with the information what you will.
- John Butters