Crowing about good earnings

August 3, 2009

Investors have been cock-a-hoop about the latest earnings season — and probably with some reason. There has been positive surprise after positive surprise, particularly in America. Thomson Reuters latest research shows that of the 337 companies in the S&P 500 that had reported through Friday, 74 percent came in above analysts expectations.

A wag might suggest that this only means that analysts are not very good. Chances are, however, that it reflects that they overshot in their pessimism, a not unusual factor. Are they now being overly optimistic?

Investors are now buying away and putting bad news to one side. Consider as one example how the ballooning of bad debts in European banks have not stopped the sector from rallying sharply.

Rupert Robinson, chief executive at Schroders Private Bank, is one of those who have injected a note of caution into the earnings euphoria. Speaking primarily of  FTSE 100 index, which is up 35 percent since a March low, he says:

“One should not lose sight of the fact that the reason profits have come in ahead of expectations is cost-cutting –- not top-line revenue growth. Cost-cutting means higher unemployment and less consumption. Less consumption means less final demand, and therefore top-line growth is likely to remain very sluggish.”

Robinson says that investors need to see real evidence of stronger economic activity feeding through into corporate earnings for signficant progress to be made from here. He is looking more closely at defensives than he was and excpects a market consolidation or correction is likely.

But he too is relatively bullish. He says the FTSE could well hit 5,000 – about 7 percent above todays levels – in the first quarter of next year.

One comment

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When you hear the outlook that most give with earnings, I don’t see the justification. Companies are beating expectations because analysts underestimated the severe cost cutting most are doing.Still skeptical about where we go from here. The market wants to go up, so it’s going up. The slightest good news sends it up triple digits. Not going to short that.