David Rosenberg’s latest contains some good insights on the current state of corporate earnings. Rosenberg says earnings are far too optimistic and likely to be ratcheted down. It’s very early in earnings season, but this is a trend we’ve already noticed in some bellwether names like FedEx and Norfolk Southern. Rosie says:
“Earnings expectations are far too optimistic and destined to come down. The consensus has operating EPS accelerating to a 13.4% growth rate in 2013 from 5.4% this year. But with margins at cycle high levels (9.4%, rivaling the 2006 record, just as the market was about to put in its last gasp to a new high) and 30% above long-run norms, it will be difficult to see EPS growth that strong absent a return to vigorous corporate pricing power. And with the PE multiple for the overall market already back to the high end of the range for the past two years, what I see at best is a sideways moving market from there. Some pundits will use interest rates as an excuse, but the weekend WSJ provided some nifty insights showing that the market multiple historically was 12X when the 10 year real bond yield was negative (versus around 14X now).
I don’t know, but a 12X multiple on a forward earnings stream that will likely be flat around $100 in the coming year doesn’t sound like a market that has a whole lot of upside from here (or until we get another announcement from a major central bank).”
Source: Gluskin Sheff