This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Doug Kass: And Now the Earnings Cliff!

In my opening missive today, I addressed the risks associated with a close presidential election next week.

It remains my view, however, that it is the challenging earnings landscape that represents the principal enemy to the U.S. stock market.

Let's put the profit challenge into perspective.

The slowdown in global economic growth has reduced top-line sales to an anemic rate of growth during a time when cost increases are eclipsing modest revenue growth. The result is that profit margins, already at near 60-year highs and a more than 300 basis points above the long-term trend line, are vulnerable.

A mean reversion in corporate profit margins has been a constant theme of mine over the last 12 months. The most vulnerable sectors include materials, industrials, energy and technology -- namely, those areas that are tied to global growth.

Slowing sales and a contraction in margins is why I expect well-below consensus 2013 S&P 500 profits of about $100 a share or less (depending on the closeness of the election). This compares to the top-down consensus of $108 a share and bottom-up consensus of $113 a share.

What has been the recent trend in sales and profits?

As of Friday night, 115 S&P 500 companies have reported third-quarter 2012 results.

If we take out financials, the year-over-year earnings change has been -2.5%, slightly ahead of consensus but representing the first decline since third quarter 2009.

According to Street sources, 59% of the companies have beaten expectations. A year ago, 69% beat expectations. This (59%) is the lowest percentage beat since the recovery began three years ago, well below the 72% average since the profit recovery began and in line with the long-term average of beats to consensus forecasts.

By contrast, 27% of the 115 reporting companies have missed relative to expectations compared to only 21% in the year-ago third quarter. This compares to the long-term average of 19% of the companies missing relative to expectations.

On the revenue side, the results have been particularly weak, with the average company reporting only 0.4% year-over-year growth and up 2%, taking out financials. Sales growth is missing consensus by 1.3 points and just 28% of the reporting S&P 500 companies are beating sales consensus while 51% are missing.

As referenced in today's opener, I expect weak nominal GDP growth in the U.S in 2013. This, coupled with a recession in EU and further deceleration in emerging markets, suggest that the sales and profit weakness in third quarter 2012 will be with us for some time to come.

It is for this reason that the market's upside appears limited even though central bankers around the world are injecting an avalanche of liquidity.
At the time of publication, Kass and his funds had no positions in the securities mentioned, although holdings can change at any time.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free

Markets

Chart of I:DJI
DOW 17,645.65 -105.26 -0.59%
S&P 500 2,049.16 -14.21 -0.69%
NASDAQ 4,721.2480 -41.9760 -0.88%

Our Tweets

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs