Earnings

The economic expansion has been so lackluster that we have expected companies to have problems growing earnings. While we have seen this Earnings Momentum decelerate somewhat, the momentum continues to look relatively strong.

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Overall earnings momentum was very good, with the best comparisons once again in the large cap sector. The largest 50 companies produced an average +13.2% year over year median gain, the best performance recorded since our earnings monitoring began in 1991.

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The vast majority of 1991 fourth quarter earnings reports have been released.

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While operating earnings may even now be on the road to recovery, an accounting rule change could produce a virtual earnings wipeout in fourth quarter reported earnings.

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On an aggregate basis, third and fourth quarter reported earnings will be below even what pessimistic prognosticators are projecting. However, looking at earnings momentum on the basis of individual companies presents a very different picture.

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We normally present our Earnings Momentum study in the Appendix on a monthly basis. Because of the current impressive results of this work and the implications for the economy and the stock market, we have decided to emphasize the study by highlighting it in the “X- rays” section this month.

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It is likely that third quarter and possibly fourth quarter earnings will be disappointing, although year over year comparisons may not look so bad.

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West Coast Client Trip...Remembering Henri de La Chapelle...Twin Cities Presentation of “Other People's Money”... Comparing Large Firms Earnings Growth with Small Firms

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While the three month earnings momentum work does not look at all encouraging, there was a glimmer of hope in June. In looking at the individual monthly data, earnings reports released in June were relatively good.

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A month ago, this work appeared to be giving some support to the “soft landing” thesis. But the earnings reports published in April provide a more negative message.

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Remember the basics: A slowing economy should bring lower interest rates but it also typically brings declining earnings, not usually a good environment for stocks.

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In November, we had a number of clients inquire about the current status of our earnings momentum monitor, so we have again decided to publish an update of this work. Just a cursory glance at our Advance/Decline chart is all that is needed to see that the earnings momentum is slowing dramatically.

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The recent results of this work clearly show that the corporate earnings momentum is slowing. In the second quarter of 1989, there were 2867 up earnings reports versus 1982 down earnings reports for a ratio of 1.45. This ratio matches the lowest ratio registered in this limited historical study.

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Are we going to see a “soft landing”, a “fly by”, or a recession? This work may ultimately provide some clues.

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Last month we presented this original indicator of earnings momentum. At that time, we commented that our quarterly reporting periods might be warped and perhaps misleading. This month we have readjusted the quarterly reporting periods so they now better track the traditional calendar quarters.

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Will the current earnings momentum be maintained in the upcoming months? Even considering the limited history of this study, the current trend would seem to be quite favorable for 1989’s first quarter and perhaps the second quarter.

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Based on past history, future long-term earnings growth assumptions of 7% (much less 10%) border on being out of touch with reality.

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This last month, a client and I were discussing what the stock market was like back in the 1960’s and early 1970’s. We saw a number of parallels with the current market.

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Mid-course corrections to our annual economic and market projections for 1987. Also, some low down dirty pirates from “out east” made a pass at Minnesota’s beloved Dayton Hudson...our Legislature's response and the Greenmail Solution.

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Last year, two original earnings momentum evaluators were introduced in this publication. Currently both are giving off constructive readings for 1987 and perhaps beyond. Unfortunately, history seems to indicate this is not necessarily a big positive for stock prices.

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