On the surface corporate earnings seem just fine. Some 63% of the companies reporting so far have exceeded expectations on the bottom line. To lay people that sounds impressive. To those who’ve spent a few years on Wall Street anything lower than tow thirds of corporate America destroying estimates is a yellow flag.
“It’s well below averages we’ve seen,” says Hugh Johnson of the earnings season to date. Johnson notes that 72 or 73% of companies typically beat expectations during a given quarter. More concerning still is the fact that the current period will be the first time we’ve seen negative growth on the bottom-line since 2012.
When a company like IBM is willing to spend more than $8 billion trying to drive up earnings per share only to see the number fall short anyway it’s hard to argue all is well. Perhaps a better tell regarding the economy is what’s happening on the top line. Revenues can be booked aggressively but faking them outright is difficult. By that measure Q1 was a rebuilding period with barely half of the companies reporting so far beating expectations.
It’s all part of a careful dance between Wall Street and the corporate America. The analysts don’t want to say anything too horrible and the companies want to give expectations that seem ambitious, yet aren’t too difficult to beat.
As it stands Johnson is expecting the year to get better in the second half. Better, but not great by any means. He’s expecting 3-4% growth by the end of this year followed by anywhere from 7 to 8% expansion in 2015.
The best way to invest in that environment depends on your level of patience and whether or not you think such disappointment is priced into the market.
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