Earlier this week, I noted that the Bullish camp likes to trot out the headline earnings data as proof of ongoing economic strength. In About Those Earnings, we specifically noted "One of the main Bullish arguments has been that very strong Earnings are not signalling a major slowdown." After all, 14 consecutive quarters of year-over-year double digit growth is no Bearish signal.
I describe this growth as "lumpy." It is highly concentrated by sector and cap size, and is not evenly distributed:
"Energy companies have recorded 50% growth in net income, while financials grew by 19%. Exclude those two groups, and net income is down 1.1%, in part due to significant dropoffs in basic materials (down 12%), consumer goods (off 11%), health care (37% lower) and technology (down 4%), and a 13% decline in telecommunications."
In a healthier environment, we should expect to see earnings growth broaden out across many more sectors in the economy. Instead, the growth is narrowing. The biggest gains are in a few sectors, and primarily in companies in big cap firms (like the S&P500 members).
But its not just me (or the perma-bears, pessimists or eeyores) who have noted this. The latest data to recognize this comes from the Commerce Department. The WSJ observed that the latest release on Corporate Profits admits:
"A slowing economy put the brakes on torrid growth of corporate
profits in the second quarter, and rising labor costs could increasingly limit
earnings growth in the months ahead.
The Commerce Department said pretax corporate profits in April,
May and June collectively rose 3.2% from the previous quarter, much slower than
the 12.6% jump in the first quarter or the 10% jump in the fourth quarter of
2005. Nonetheless, profits in the second quarter were 20.5% higher than a year
ago and accounted for 12.2% of gross domestic product in the second quarter, the
highest level in 40 years."
So while year over year growth remains strong, it has begun to slow sequentially.
Corporate Profit Growth Slows in Step With Economy
August 31, 2006; Page A3