Fourth-Quarter U.S. Corporate Earnings Outlook
Companies in key stock indices like the S&P 500 have started reporting their corporate earnings for the fourth quarter of 2012.
There is a heavy concentration of earnings in a small number of S&P 500 companies. Only 10 companies in the S&P 500 make up 88% of all corporate earnings for the index as per Morgan Stanley research; the other 490 companies only make up a menial 12% of the total corporate earnings of the S&P 500. (Source: Business Insider, November 26, 2012.)
According to Thompson Reuters, fourth-quarter corporate earnings for S&P 500 companies are only expected to grow 1.9% year-over-year. Only three months ago, this earnings estimate was as high as 9.9%; this past summer, fourth-quarter 2012 earnings were expected to be 13.7% higher than fourth-quarter 2011 earnings. (Source: Streetwise, January 12, 2013.)
Since it’s still early, not many companies in the S&P 500 index have reported their fourth-quarter 2012 earnings, but from those that have reported, it is not encouraging. For example, Bank of America Corporation (NYSE/BAC) saw its corporate earnings fall 63% in the fourth quarter of 2012.
Citigroup, Inc. (NYSE/C), another big bank on the S&P 500, missed its fourth-quarter corporate earnings forecast. The CEO of the bank, Michael Corbat, explained the poor corporate earnings by saying, “It will take some time to work through the challenges of the current environment.” (Source: CNN Money, January 17, 2013.)
But even with the poor numbers in from Bank America and Citigroup, optimism towards key stock indices is increasing at a surprising rate. (Remember, the more optimism increases amongst stock advisor and investors, the more bearish it is for the stock market.)
Corporate earnings growth for the fourth quarter of 2012, at this point, is questionable. With Thompson Reuters predicting growth of only 1.9% for fourth-quarter earnings, a few surprises could easily turn corporate earnings growth into contraction.
As I have been saying in these pages recently, the stock market is piling up a lot of risk and missing the most important ingredient to any sustainable stock market rally: corporate earnings. Investors should be very cautious at these recent key stock market index highs. We could be in the midst of a market top and investors surely don’t want to be caught in it.
What He Said:
“The proof the party is over in the U.S. housing market could not be clearer to me. The price action of the new-home builder stocks is telling the true story—these stocks are falling in price daily (and the media is not picking it up.) Those that will hurt most when the air is finally let out of the housing market balloon will be those buyers who bought in late 2005. In fact, the latecomers to the U.S. housing market may end up looking like the latecomers to the tech-stock rally that ended so abruptly in 1999.” Michael Lombardi in Profit Confidential, March 1, 2006. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.