Anyone who pays attention to stock trading knows that stock
market and uncertainty are two sides of the same coin. In the Wall Street
Journal article “Faith, Hope and No Clarity for Earnings”, the author Liam
Denning tries to shed light on the fact that no one can predict for sure what
is to come on Wall Street. The author brings attention to the growth estimate of
S&P 500 companies for 2014, which stands at odds with the present state of
the global economy.
The basic data for the analysis and the forecast came
from Thomson Reuters on the S&P 500 Companies. The data was presented through
a histogram of revenue and net income growth for all quarters of 2012, 2013 and
the forecast growth figures for first three quarters of 2014. Ironically, in
most quarters except for two quarters in 2013, the revenue growth seems to be
lagging behind the net income growth reported or predicted by wide margins. It
makes one wonder what kind of negative operating expenses were used to arrive
at the net income growth to be greater than the revenue growth.
Growth forecast for 2014 S&P Earnings per share are
stated to be at 11.4% even when all other indicators point in the opposite
direction. Fiscal uncertainty due to political stalemate in the US, weak
international growth forecast, inevitable slowing or ending of Federal Reserve’s
bond-buying effort, and slowness in the growth in the emerging world, do not
tie well with the projected growth rate for 2014.
Breakup of growth forecast in consumer-discretionary
stocks, energy stocks, and steel stocks all contributing to the net income growth
by 16%, 12% and 14.9% respectively, from
last year. Interestingly, rest of the component of the industries that brought
down growth forecast to an average 11.4% is not presented. Author makes it a
point to mention that for each of these sectors, sales growth prediction is
unsubstantial with prevailing conditions. According to one equity strategist,
favorable effective tax rates might have offset the losses during recession and
may be helping to keep income rise even in this turbulent market conditions.
The process of collection and analysis of the financial
data on the growth of the S&P 500 companies was not explained in the
article. Moreover, the details, on how the growth forecast was arrived at, were
also not provided. One has to assume that it is based on internal and external financial
analysis of a representative sample group of the companies if not on the entire
population of S&P 500 companies.
The author however concludes with a note of further
optimism in the US markets, despite many of the negative indicators in the
macroeconomic affairs of the global markets. It would have been more convincing
if more insight to the data retrieval and analysis was presented along with the
analysis.
Interestingly
enough, another unrelated article “Are You Prepared for the Next Crash?”
appeared two days later in WSJ reminding
us of the anniversary of the worst one day stock-market crash of Oct 1987 and presenting
a theory that predict the number of
daily crashes over a long period of time in the stock market. This theory is based on
probability calculations by Xavier Gabaix, a Finance Professor at New York
University. According to these probability calculations, a 20% slide in the
market could happen once in 100 years, 15% drop in once in every 50 years, 10%
slide in every 13 years, and 5% drop in every two years. This probability
estimation seems to be holding good against US, Japan and Hong Kong markets so
far.
Is this a series of misleading optimism or disguised
pessimism?
For those interested serious readers, more authentic insight
and analysis based on latest earnings from S&P 500‘s companies are provided
by ‘FACTSET Earnings Insight’ located at
Resources:
Article:
Other references:
“Are you prepared for the next crash?”
‘FACTSET Earnings Insight’ located at
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