|
Recent record highs for the S&P 500, notwithstanding this week's stumble, have been chalked up to another strong earnings season. With 92% of the index's constituents having reported results, nearly 70% exceeded analyst expectations. That certainly sounds good and, even by Wall Street standards, it was. Recent years have seen earnings "beats" average around 63%.
But there was less than meets the eye to the latest reports, and that should give the bulls pause.
For one, a record number and percentage of companies issued negative guidance before earnings season, according to late-March data from FactSet. That was likely a combination of executives' desire to set expectations low and a symptom of genuinely lousy economic growth during the quarter. Cold, snowy weather was cited by many companies and U.S. economic growth was barely positive.
That is a problem because there are essentially three factors at work in a bull market for stocks. First is revenue growth, which is largely tied to nominal gross domestic product. Nominal GDP has climbed at an average annual pace of just 3.7% in the current expansion. During the prior three expansions dating to 1982, it was 7.5%, 5.6% and 5.2%.
The second leg is margin expansion. Net margins for the S&P 500's members have reached a trailing 12-month level of 9.8%. That is a record and is up from 5.6% at the bull market's start in March 2009.
|
