Blogger's Take: Q4 Earnings

Thursday, January 18, 2007 | 07:00 PM

Welcome back to Blogger's Take: Each week, we ask a timely and relevant question, and post a paragrpah or three from our pool of bloggers.

Today's question is on Earnings: What might we expect from this Earnings season -- good, bad, or indifferent?  Is this a particularly important Q, or is this merely another Quarter? Should we be looking for anything special?

Here's the answers:

Discussions on earnings are always challenging, in that time frame plays an important role. In the longer term we have discussed the importance of currently record high profit margins have had on robust earnings growth. The evolution of earnings over the long term will depend a great deal on how profit margins evolve. Over the short term, another issue springs to mind. For instance, how the source of potential earnings growth is going to shift from once-hot sectors like energy to other sectors. Tom Petruno in the Los Angeles Times discusses this mix shift, and Pui-Wing Tam in the Wall Street Journal focuses on heightened earnings expectations for the technology sector in 2007. If other sectors are not able to pick up the slack from the once-highflying energy sector, disappointing headline earnings numbers may be waiting. The bottom line seems to be that investors need to look behind the headline numbers to the sources of earnings in the New Year. Then again, isn’t that always the case?   

-Abnormal Returns

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A good economy and in particular falling oil prices should help push earnings higher.  I expect the earnings season to be a good one, but not one that has any undue significance.  I think investors at the moment are going to pay more attention to inflation indicators, consumer sentiment, and real estate price trends.

Rob May

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Do earnings for the Q4, 2006 matter to the market? I think we are fairly late in the stock market cycle. If this is correct I tend to take that to mean that a good earnings season won°òt really help the market do any better than it has been going for the last few months, meaning a good season won't accelerate gains. I do think that a bad earnings season has the ability to trigger a normal 10% market correction.

If you read Barry’s site regularly you are in touch with the length of time since the last 10% correction and the last 2% single day decline. The market will have both of these at some point again (even if we can't time it correctly) and earnings perceived as weak could be the catalyst.

Roger Nusbaum

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I’m afraid I have some bad news to report—the profit party is coming to an end. Now I realize some of you may have missed it. Actually, if you’re a worker, I’m pretty darn sure you missed it. But damn, what a party. Since the third quarter of 2001, the economy has grown by 31% (in nominal terms). Not bad. But corporate profits? Hold your hat. Up 132%. Now that’s growth! Corporate profits now represent the largest share of the economy in over 50 years.

But all that’s coming to an end. A year ago, fourth-quarter profit growth was pegged at 15%. Not anymore. For the first time in 19 quarters, the operating earnings growth of the S&P 500 will come in below 10%. But promise me you won’t tell anyone on Planet Wall Street. The Dow recently hit at a new all-time high (again) and I wouldn’t want anything frightening it (facts, reality, etc.).

The picture is even bleaker than the surface is telling us. For example, insurance companies are experiencing out-sized gains this year to thanks to a light-hurricane season combined heavy losses last year from Katrina.

Lower energy prices are taking a toll on energy stocks. That sector is expected to report an earnings decline of 5.8%. The outlook is particular rough for the tech sector. Tech stocks are looking at their second straight quarter of lower earnings. Plus, we’ve seen profit warnings from once-shining stars like Advanced Micro Devices (AMD), Xilinx (XLNX) and Texas Instruments (TXN). Poor Intel (INTC). That stock is basically where it was ten years ago (way back when Andy Grove was Time’s “Man of the Year”).

But all is not lost. Earnings growth may merely be leveling off instead of plunging into the abyss. Consider that one-fourth of the S&P 500’s profits come from outside the U.S.  That’s a big change from years past. Also, there are bright spots here and there. For example, Guess (GES) just raised its fourth-quarter earnings forecast about 40% higher.

The good earnings are out there. You just have to look a little harder to find them.

-Eddy Elfenbein

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Thursday, January 18, 2007 | 07:00 PM | Permalink | Comments (4) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



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The answer to earnings growth is 42.

Posted by: alexd | Jan 18, 2007 7:52:28 PM

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