Fisher Investments Editorial Staff
Corporate Earnings, US Economy

Geared for Growth

By, 11/08/2010

Story Highlights:

  • Corporate earnings are once again beating expectations in Q3.
  • Though little noticed, positive earnings growth is spread across almost all sectors.
  • Unlike earlier quarters, recent profits are due to both productivity gains and rising revenues.

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The week through Friday marked the end of peak Q3 earnings season. Reported profit growth is again outstanding—a fact that's largely flown under the radar amid midterm elections, the Fed's QE2, and October unemployment.

Positive Q3 earnings growth is spread across almost all sectors. Of 436 S&P 500 reporting companies, 74% beat analyst expectations by an average +7%. That's well above the norm. Since 1994, 62% of S&P firms beat expectations by an average of only +2%. Aggregate earnings will likely check in above 30% y/y (a fourth consecutive quarter of stellar growth), beating expectations of 24% at the beginning of earnings season.* Not half bad!

Some worry profit growth is primarily due to firms streamlining operations during and after the recession—there's only so lean you can get without revenue growth before profit growth dwindles. But recent profits are due to both productivity (up +1.9% in Q3) and revenues (+8% y/y in Q3). Firms are making and selling more with less—and the difference flows straight to the bottom line.

There's still an awful lot of focus on weak employment, "anemic" growth, etc.—but what's less noted is these topics are tangential for stock investors. Investors make money when firms make money, and firms can make money in a variety of economic environments. It's critical to separate the economy from the stock market—the two do not move in lockstep. That's not to say today's economy is as bad as widely spun. It's not. But even if you don't believe the economy will shift to a higher gear—that doesn't necessarily doom your portfolio. And if, by chance, growth surprises folks (as it has been wont to do lately)—all the better.

* Thomson Reuters, November 5, 2010 "This Week In Earnings"

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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