This column originally appeared on Real Money Pro at 9:20 a.m. EST on Feb. 11.
NEW YORK (Real Money) -- Similar to this past weekend's brutal blizzard, the interpretation of fourth-quarter 2012 U.S. corporate profits and the expectations for prosperity in 2013 is another big snow job. The current disconnect between stock prices and the slowing pace of earnings growth is reminiscent of the second half of 2007. The difference between then and now is 2007's emerging weakness was centered in the financial sector. By contrast, in late 2012 and expected in early 2013, the profit weakness is more broad-based.
Today, despite analysts and strategists unrealistic optimism, participants' confidence in the markets is elevated, as investors have cared little about slowing growth. Reality will prevail, however, as ultimately corporate profits are the mother's milk (hat tip to Sir Larry Kudlow) of the markets.
At the start of the earnings season, the consensus forecast for fourth-quarter 2012 S&P 500 profits was about $25.50 a share -- now, with over 80% of the companies reporting, $23.50 a share looks more likely. As Alhambra Partners opines, "missing fourth quarter 2012 by 20% is not a rounding error."A disappointing picture for S&P earnings lies at the core of my ursine market views. In the fullness of time, it will not likely be ignored. I continue to see an earnings cliff ahead. Consensus, top-down and bottom-up 2013 forecasts for the S&P 500 are at $108 a share, $107 a share and $112 a share, respectively, up from about $102 a share expected in 2012. My projection is for $100 a share or less for S&P profits -- well below 2013 consensus and under the anticipated actual 2012 earnings. I was recently asked by Melissa Lee on "Fast Money," whether the S&P is cheaper today than it was when it made a high in 2007. In that appearance, I explained that markets discount the future, not the past -- and Zero Hedge illustrates my point that stocks today are more expensive today compared to 2007. In this excellent post, Alhambra Partners demonstrates:
- the loss of corporate profit and sales momentum;
- how far operating profit forecasts have fallen in the last few months; and
- why an expected "hockey stick" recovery in earnings is unlikely.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV