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Troubles with the Profit Forecasts



January 05, 2011 – Comments (6)

Thoughts from David Rosenberg regarding S&P earnings for 2011. From


The consensus now sees $96 for S&P 500 operating earnings for 2011 which would be a 14% boost from what we saw in 2010. Let’s assume that two percentage points of that come from stock buybacks. That’s fine. Companies have the cash to do that. So call it 12% EPS growth delivered from the economy. We know that the ex-U.S. economy is going to slow down this year so the adage of 50% being derived outside of America is not going to be such a bullish story in the coming twelve months. The markets have already discounted this, which is why the U.S. stock market has so vastly outperformed the rest of the world of late. America is home to dramatic fiscal and monetary ease while Europe is busy tightening the former and emerging Asia busy tightening the latter. Only the U.S. reserves the right to ease policy on both fronts but this really does little more than mask the underlying structural weaknesses in housing, jobs and state and local government finances that were so eloquently described in yesterday’s FOMC minutes.

Here’s the rub. It is not possible that a 4% nominal GDP growth is going to deliver 14% earnings growth at this stage of the profit cycle, with margins already flirting near all-time highs. This is not the early or even the mid stages of the profit cycle ― the V-shaped bounce off the lows puts it closer to the latter stages. Mid at best. Now when we are coming out of recession and margins are positioned to expand sharply even with a modest bounce in the economy, it is not rare at all to see double-digit gains in corporate earnings. It’s called the “rubber band effect”. Indeed, we saw this in 1993 when 5% nominal GDP growth translated into 29% EPS growth; in 2002 when 3.5% nominal GDP growth coincided with 18.5% profit growth; and again in 2009 when in fact a -1.7% growth rate gave way to a 15% profits rebound. But at this stage of the cycle, history shows that it would take between 6% and 8% nominal GDP growth to allow for a 14% earnings stream.

The consensus of economists, as bullish as it is, see 4% nominal GDP growth in 2011. The strategists see 14% profit growth net of buybacks. Either something has to give ― or at the least the economists and strategists should spend more time in the same room with each other.

6 Comments – Post Your Own

#1) On January 05, 2011 at 1:58 PM, leohaas (30.08) wrote:

Not so sure this article has any value. At all.

Let's take a look at what happened in the four years following 2002 (which the article uses as a reference):

Year  EPS growth
===  =========
2002  18.5 %
2003  18.8 %
2004  23.8 %
2005  13.0 %
2006  14.7 %

There is no reason why EPS growth cannot be in the double digits for an extended period of time, even while in a secular bear market! So I don't see the alleged disconnect between the economists and strategists...

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#2) On January 05, 2011 at 2:14 PM, amassafortune (29.23) wrote:

$96 does seem high, but these estimates have been around for most of 2010 without much strong refutation. At first, I thought this was just part of the massive, almost conspiratorial market pump of 2010. 

Mark-to-market continues to overstate earnings and that will probably be the case for another 2-3 years. If financials and other real estate-related S&P members are 40% of the market and their RE and RE-backed assets are overstated by (conservatively) 20%, then S&P earnings are already overstated by about 8% just because of mark-to-market.

I keep hearing more and more talk of a profits holiday to allow multi-nationals to repatriate hundreds of millions of profits. If that happens, $96 S&P earnings will be a cake walk.

Finreg still allows auto companies to knowingly bundle and bet against auto loans made to sub-prime customers. Zero Hedge has some good articles on how GM especially is already stuffing dealers with inventory levels far above the current sell rate. Notice how your local banks are pushing auto loans more heavily than mortgage loans. We are early in the process, but AIG-like activities are back in vogue, and thanks to Congress, the threat of jail time has been removed.

One detail I have not been able to find is if auto loans can be bundled with RE loans and the resulting derivative still keeps the auto-derivative Finreg protections. If this is so, then the Finreg legislation provided no derivative protection at all.

As for S&P profits, these few points show a way to get to the $96 number, but it would be a 2008-style success with little evidence of comparable underlying sustainable commerce.    

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#3) On January 05, 2011 at 3:31 PM, binve (< 20) wrote:


Thanks you for the counter argument


Hey amass! Those are very good points and I do think you have something. Nothing sustainable but the charade can be kept going for a bit longer. Thanks!..

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#4) On January 05, 2011 at 11:01 PM, rd80 (94.78) wrote:

If financials and other real estate-related S&P members are 40% of the market

They're not. Financials are a little over 16% of the S&P500 Pie chart in the middle of the linked page shows the breakdown.

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#5) On January 06, 2011 at 10:15 AM, Option1307 (30.65) wrote:

I always enjoy hearing what Rosenberg has to say, thanks B man!

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#6) On January 21, 2011 at 8:36 PM, amassafortune (29.23) wrote:

Here's a ZH piece that contends the announcement to allow repatriation of offshore profits with low-to-no taxes may be only weeks away. 

Add this to today's (1/21/11) announced appointment of J. Immelt to Obama's economic recovery advisory panel and it is clear that the 2012 election is underway. 

These two developments are either a case of keeping ones friends close and enemies closer, or a simple realization that more friends are needed in the new center Obama is carving out since being handed such a clear defeat during the congressional elections. 

In any case, the high 2011 S&P earnings estimates are more likely with the pending repatriation news. ZeroHedge estimates the transfer could reach $1 trillion dollars.  

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