Experimental feature

Listen to this article

00:00
00:00
Experimental feature
or

During the last US earnings season, investors were cheered by a slowing drop in profits. The deceleration continues, but investors may be harder to impress than they were just three months ago.

Operating earnings for the Standard & Poor’s 500 will be down by “only” 17 per cent year on year to $14.06 a share, according to S&P. (The percentage drop would be twice as much using data from Thomson Reuters, which removes former index constituents such as General Motors and Merrill Lynch, and so compares earnings only for the current crop.) In keeping with recent patterns, the bar companies are expected to vault has dropped. The forecast was $19.92 at the end of 2008. Six months before that, in June, it was $26.73. Even so, the rate at which forecasts fell has moderated as markets have rallied and “green shoots” sightings have multiplied.

Since March, forecasts have dropped a mere 78 cents, or 5 per cent. That is a fairly typical slide as companies manage expectations. The potential for disappointment will be higher than last quarter though. Even if companies “make their number”, investors will question the method used to achieve that, and when earnings might even return to their 2006 peak. With core operating earnings seen at $55.54 for the full calendar year by S&P, stocks have rallied from 12 times earnings four months ago to more than 16 times now. This implies a steady recovery that must be broad based.

Financial companies’ surging profits cannot carry the load alone; – they have shrivelled to just 15 per cent of the S&P 500’s earnings base. Energy and materials, which will see steep declines through at least the third quarter after 2008’s commodity boom, make up a combined 45 per cent of the base. Even if not firing on all cylinders, corporate America will soon have to fire up more of its engines if investor faith in the recovery is to be sustained.

E-mail the Lex team confidentially
OR
Post public comments

The Lex column is on Twitter

_________________________________________

Lex is the FT’s agenda-setting column, giving an authoritative view on corporate and financial matters. It is also one of the few parts of FT.com available only to Premium subscribers. This article is provided for free as an example. A Premium subscription gives you unlimited access to all FT content, including all Lex articles and the FT mobile Newsreader.

Subscribe to FT.com

If you have questions or comments, please e-mail help@ft.com or call:

US and Canada: +1 800 628 8088
Asia: +852 2905 5555
UK, Europe and rest of the world: +44 (0)20 7775 6248

Copyright The Financial Times Limited 2018. All rights reserved.

Comments have not been enabled for this article.