The latest earnings season is now officially over and it was very strong. U.S. corporations have been remarkably strong throughout the Great Recession and it now appears that they’re regaining some strength. The official tally for the Q3 earnings season showed 9.25% year over year growth in revenues and 30.83% growth in operating earnings. The margin driven recovery is slowly turning into an organic revenue driven recovery. That’s a very good sign.
If there has been one very distinct trend that I have highlighted every quarter since 2009 it has been this turnaround in earnings. Every quarter since early 2009 has been highlighted by vast outperformance. My Expectation Ratio takes a much deeper look into the condition of corporate balance sheets and compares this to a broad series of analyst’s expectations. In early January of 2009 I highlighted how analyst’s expectations had simply become far too depressed and were finally showing signs of being pessimistic to the point that a long-term buy and hold position was desirable:
“The indicator has only just recently become positive again which is telling me that analysts are finally beginning to cut their estimates to realistic levels. The indicator was a little early to the party in 2007 and I presume it will be early again in forecasting a recovery, however, it is a good sign that now is a time when you might want to be dipping your toe in the waters. If you’re young and have a long time horizon you certainly want to be adding to positions.”
By comparing psychology to reality we create not only a forward looking indicator, but an intuitive indicator. Unfortunately, because it is based on a rolling quarterly data set it is not necessarily a short-term indicator, but is better utilized to gauge the long-term trend in the earnings picture. Currently, the indicator is showing a robust profit picture with strength across most facets of the corporate balance sheet. Analysts continue to underestimate the strength of corporate America and as long as this trend is in place it is very difficult to imagine a severe and sustained stock market decline (best evidenced by my recent and futile attempt to short the equity markets).
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.