I Guess We Have Our Answer

Joshua Brown, writing for The Reformed Broker:

“How’s earnings season going? Only 42.3% of S&P 500 reported companies beat Q3 revenue expectations and 57.7% have missed. 64.9% have beat EPS estimates. Sucks.

On Monday, I laid out the only question that I felt mattered for the markets. And based on this week’s earnings reports and today’s catching-up reaction, I think we have our answer…”

Joshua asked “Is the weak earnings picture for Q3 the start of a new trend toward lower profitability or a bump on the road to full recovery?”

I say lower profitability. Corporate profits are at a record level, thanks mainly to manageable debt and reduced payroll expenses (read: laid off workers). Looking at a chart of corporate profits, a reversion to the mean seems likely.

How to push profits back up? Hire more workers who turn out more goods and services, which in turn brings in more revenue. Managed correctly that translates to increased profits. But companies won’t go on a hiring spree until they see the economy improve. While sentiment has improved lately we’re still not yet to the promised land. I think none of this will change until the president and Congress resolve the looming “fiscal cliff” scenario facing us this January.