Macro Wrap – Earnings Season Starts, Big Picture Charts

by Enis January 8, 2013 7:17 am • Commentary

Alcoa kicks off the traditional earnings season with its report after today’s close.  The “traditional” earnings season has dramatically evolved in the past 5 years, so that company reports are spread out throughout the quarter, as opposed to the several-week cluster of reports during the traditional season.  For example, MON reports this morning at 8am, a blow to Alcoa’s traditional place as the sole large company flag bearer on the first day of the traditional earnings season.

But in deference to traditional earnings season starting today, I have a couple big picture, macro charts related to U.S. corporate earnings.

First, the chart of S&P earnings growth over the last decade is one we highlighted over the second half of last year when earnings results came in weaker than expected for 2 straight quarters.  Here is the 20 year view, courtesy of JPMorgan:


Screen Shot 2013-01-08 at 6.46.20 AM



Clearly, the negative earnings growth that we witnessed last quarter is quite rare outside a recessionary economic environment.  However, there were a few blips during the 1990’s, so it’s not unprecedented (the uninterrupted growth from 2003 to 2007 is the real anomaly).  But this chart is the primary reason why the upcoming earnings season is so crucial.  If companies report stronger earnings, then the blip might be just that – a blip.  If not, then the market’s newfound optimism is resting on shaky foundations, with no recent historical precedent.

The second chart has been endlessly debated for the past 2 years.  It shows economy-wide profit margins (again courtesy of JPMorgan Research):


Screen Shot 2013-01-08 at 6.56.43 AM



The bulls argue that high profit margins are a sign of well-run businesses maximizing shareholder value.  The bears of course think margins are likely to decline from here based on history.  Once again, this earnings season will play a major part in signaling the general trend in corporate margins for 2013.  I’ll be closely watching commentary and guidance to hear executives’ thoughts on the sustainability of current margins.

The bulk of earnings will be reported in the following two weeks.  The unanswered question as of now – blip or not?

Markets overnight:

  • Quiet start to the week, both yesterday and today.  Asia was mostly red, led by Japan and Hong Kong down nearly 1%, after very strong gains in the past 2 months.
  • Europe reversed after a red open.  Business and consumer confidence rose more than expected, as sovereign debt concerns continue to ease.
  • MON reports at 8am and AA and APOL report after the close.
  • Other major earnings reports this week:  STZ Jan 9th, before open and WFC Jan 11th, before open.