Monday 12 June 2017

US earnings, mostly negative surprises vs analyst projections

Most earnings surprises the last few years have been negative, as you might expect as margins peak and start to go into reverse.

With S&P sales forecast to grow 5.4% in 2017 and margins falling across the US economy, S&P earnings growth should be quite low for the year, if things continue as they are (low but positive growth with no big negative surprises).

Nevertheless for the full year the sell side sees 9.9% profits growth vs 5.4% sales growth. So the sell side is forecasting margin expansion, driven by four sectors. But we have seen weakness in commodity prices and a flattening of the yield curve recently, so that undermines the likelihood in my view of earnings growing faster than sales, in fact they should be compressing.

At the per share level companies have been buying back shares, at more or less cycle peak levels. And often using debt to do so, with buybacks running at 66% of earnings! (Q1 buyback data is not out yet)

Overall, we have not seen the impact of wages/ inflation or Fed hiking yet on margins, but over the next two years it should be coming. US corp margins are still near more or less all time highs, so there is plenty of downside to come yet.

The  slowing of credit growth recorded by the Fed H8 survey, vs financial re-leveraging in the Z1 flow of funds surveys show the increasing divergence between the operating businesses and the balance sheets. Similarly sideways profits/ falling economy-wide margins, vs an S&P expected to record margin expansion is another unsustainable divergence.

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