Review & Outlook

Our take on the investing, financial, & economic themes of the day

Third Quarter Earnings, Part II

7 December, 2011 by Ben O'Brien in Commentary

Since our last earnings update the market has continued to be rocked by volatility—the Dow shed almost 800 points in mid-November in reaction to the European debt crisis but quickly bounced back above 12,000.  Meanwhile, earnings reports have continued to look good.  At the time of our last post, third quarter earnings were up 18% over the third quarter last year. Since then growth has moderated a bit but is still strong:

  • Total earnings growth for the S&P 500 was 14.9% over last year’s third quarter and 17.8% if you leave out the troubled financial sector.
  • Sales grew 11.89%. This is important because it shows that earnings are coming from companies doing more business and not only from cutting costs.
  • 64.9% of companies beat the official earnings estimates published  by Wall Street brokerage firms. 58.3% beat revenue estimates.
  • Net margins expanded to 9.36% from 9.06% a year ago. This shows companies are adapting and cutting costs to become more profitable.

These results reflect the relatively healthy condition of the corporate sector, despite our many economic challenges. As earnings grow and the market remains relatively flat (despite its many fluctuations) for the year, stocks look increasingly attractive, especially in comparison to bonds which have record low yields. Taking third quarter earnings into account puts P/E ratios for the S&P 500 at 13.05 for 2011 and only 11.87 for 2012.

As we get down to the homestretch for the year there are some big questions outstanding. What will be the effect of the European crisis on fourth quarter earnings? What is the effect of the slight slowdown in emerging markets?