Are Expectations for Q2 Earnings Too High?

by: David Jackson

Excerpt from our One Page Annotated Wall Street Journal Summary (which you can get emailed to you every morning by signing up here):

MARKET MOVERS: Investors Await Profit Reports With Wary Eye

  • Summary: Profits for the S&P 500, based on a bottoms-up aggregation of sell-side analyst estimates, are now projected to grow by 12.3% year over year for Q2, 15.3% in Q3, 14.8% in Q4 and 10.8% in 2007. Profits grew by 7% on average since the 1970s, and the longest run of double-digit profit gains was 13 quarters in the early 1990s. This quarter will mark the 12th consecutive quarter of double-digit gains. That raises the possibility that profit expections are too high and actual results may disappoint. Wells Capital Management chief investment strategist James Paulsen believes that strong profit margins, continuing pricing power and rapid sales growth will drive stocks until Fed interest rate increases dampen the economy and stock market.
  • Comment on related stocks/ETFs: The bearish view on this is that profit margins reliably revert to the mean, and at the moment they are way above average. See, in particular, the views of Jeremy Grantham and John Hussman.