The End of the Streak

No, not Bill Miller’s streak.

As we mentioned back in February, the end of 18 consecutive quarters of double digit year over year gains in the S&P500 earnings has arrived. Not that double digits are magically meaningful — growth still exists, its just at decreased levels, and decelerating.

Indeed, the overall profit picture is likely to continue worsening. This has significant economic and  market implications (especially to those followers of the Fed Model).

With the consumer running out of financing options, and businesses too skittish to spend aggressively, its not too difficult to see how this can keep trending lower. 

Here’s the statement on Q4 2006 operating earnings via Standard & Poor’s:

"Fourth quarter 2006 operating earnings for the S&P 500 increased 8.9% over the fourth quarter 2005, marking the first time that the index has failed to post double-digit earnings growth since the first quarter of 2002, eighteen quarters ago.

Fourth quarter operating earnings were finalized at $21.99 per share, compared to $20.19 in the fourth quarter of 2005.  For the year, the index posted record earnings of $87.72 versus $76.45 for 2005, or a 14.7% gain compared to a 13.0% gain in 2005. 

According to Standard & Poor’s, sector performance varied significantly.  Materials surged 47% for the quarter, partially due to a depressed Q4 2005 comparison, and Energy, with lower oil prices and harder compressions to their Q4 2005 earnings, reported a 5.8% decline.  For the year, all ten sectors were positive with seven reporting double-digit gains.  Information Technology, whose earnings were down in both the second (-2.66%) and fourth quarter (-2.80%), reported a 1.3% gain for the year.

BusinessWeek got melancholy with the news:

"Here’s a funeral oration that may bring a small tear to the eye of Wall
Street pro and individual investor alike. "Today we lay to rest our
friend Mr. Double Digit. He was a steadfast ally of investors for a
number of years, and perhaps it can be said that we took him for
granted as he continued his winning ways. True, he enjoyed robust
health up to the very end of his life. But alas, today he goes to his
final rest after 18 consecutive quarters of reliably exceeding that
magical 10% figure we seem to fixate on. He’ll always hold two places
in our hearts."

Here’s the S&P data for 2006 versus 2005:

Eps_0605_3

Their forecasts for 2007 expects year over year data to come in as follows:

Q1. . . . .    Q2. . . . .    Q3 . . . . .  Q4 . . . .   2007
4.96%. . . . 5.80%. . .  .2.90% . . .14.64% . . . 7.06%

Sources:

S&P 500 Indices
Monthly and Annual returns S&P 500 Earnings and Estimates
www.marketattributes.standardandpoors.com

R.I.P., Double-Digit Earnings Growth
Businessweek, April 3, 2007, 4:30PM EST
http://www.businessweek.com/investing/content/apr2007/
pi20070403_299649.htm?chan=investing_investing+main

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