Can Strong Earnings Growth Continue?

Amy Magnotta, CFA, Brinker Capital

Third quarter earnings season has begun with 70 of the S&P 500 companies reporting so far. Overall earnings and sales have surprised on the upside, with the largest surprise in the financials sector.  Third quarter estimates may have been brought down enough to create positive earnings surprises.  For those 70 companies reporting, year over year sales growth has been +1.5%, with earnings growth of +2.7% (Source: Bloomberg).

Source: Strategas Research Partners, LLC

Strategas analysts expect a 12% increase in operating earnings for 2013, which seems a bit aggressive in the face of a 4% nominal growth rate and declining margins.  With margins rolling over, companies need to generate stronger top line growth which will be more difficult as global growth slows further.

Companies remain cautious.  In his commentary earlier this week, Joe Preisser mentioned a downgrade in global growth expectations from two large industrial companies.  The fiscal cliff and regulatory policy uncertainty are also playing a role in holding back hiring and capex spending.  CEO confidence is at low levels.

While it looks like we are on our way to another quarter of profit growth, growth in coming quarters may be more difficult to achieve.  However, with stronger balance sheets, companies are in a better position to withstand a downturn.  The resolution of fiscal and regulatory issues could boost confidence, leading to increased hiring and spending, and as a result, stronger economic growth.

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