Wednesday, 11 February 2009

US Corporate Earnings Collapse

Back in November I warned of an Imminent Earnings Meltdown. At that time I argued that despite optimistic forecasts of US corporate earnings showing growth in 4Q08 I was convinced that they would actually decline given that the economic deterioration had spread to the broader economy.

As has been the case on previous occasions, my seemingly bearish outlook proved to be overly optimistic. With a little more than 70% of S&P500 companies having reported, operating earnings for 4Q08 are expected to decline a whopping -46.2% from the previous year. That is all the more stunning when you consider that 4Q07 was the worst quarter in the current cycle up until now.

Analysts have also been busy slashing their forecasts for the rest of 2009, 1Q09 and 2Q09 operating earnings are both expected to decline, with earnings picking up in the second half.

FY09 operating earnings are now expected to come in at $68.88 per share, that is down from over $100 just 4 months ago. As stated many times, I do not buy into the second half recovery. Back in November I estimated that FY09 operating earnings will be closer to $60, I believe now it will be closer to $40.

And if you think that's bad consider reported earnings, that is earnings before bad stuff (writedowns etc.) for 4Q08 are expected to be -$8.73. That is not a misprint, the combined earnings of all publicly listed companies in the United States add up to a loss. When was the last time that happened you ask? Never, that has never happened before since S&P has been recording data.

We should be clear, we are not going back to record earnings in 2009 and you can forget about it in 2010. Corporate profits have to some extent been driven in recent years by the excessive amounts of easy credit and massive amounts of leverage in the financial sector in particular.

We are making a secular shift to an economy built on much lower leverage and thus the inflated corporate profits of recent years are not going to come back for years to come. I still believe, despite massive downgrades by analysts that the market still has not priced in the full extent of the decline to a lower level of corporate profits in coming years.