Don’t count on a boost from profits this year
Jan 20, 2012
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Strong earnings have helped offset jitters over the macroeconomic backdrop in recent months, notably on Wall Street, which sets the tone for world markets. But this pattern is unlikely to continue.
For the first time since the financial crisis in 2008, a third of the early reporters in the fourth-quarter earnings-reporting season, which started last week, have missed estimates, says Nick Raich of Key Private Bank.
The headwinds for American profits are strengthening. Not only are margins at historic highs and thus set to fall, as analysts Capital Economics points out, but the strengthening dollar is likely to temper profits as more than 40% of S&P 500 revenues are earned outside America. The dollar looks set to keep appreciating as the downturn in Europe and Asia, which will also undermine profits, makes it more appealing.
Nor does it help matters that profit forecasts for this year are still likely to suffer further downgrades, damaging sentiment, adds James Mackintosh in the FT. Analysts tend to be “hopeless” at predicting profits.
Work by Peter Oppenheimer of Goldman Sachs shows that not once in 26 years have American or European analysts as a group predicted sliding profits at the start of a year, even though they fell around a third of the time.
Even in 2009 the consensus forecast a rise for S&P earnings. So “it seems optimistic, to say the least”, to pencil in a near-10% earnings rise in America and an 8% increase in Europe, says Mackintosh. “More downgrades are needed.”
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