Fisher Investments Editorial Staff
Corporate Earnings

Hard-Earned Profits

By, 07/28/2009

Story Highlights:

  • As of last week, 77% of reporting S&P 500 companies announced Q2 earnings that beat estimates.
  • Reported revenue slightly shrank, but soft revenue compared to solid earnings is typical at the beginning of most upward cycles.
  • The difference between earnings and revenue is starker today because modern business information systems help companies react to economic conditions faster and easier.
  • This led to a sharp drop-off in economic activity because firms trimmed down quickly, but the same technology will allow them to ramp up quickly too—possibly hastening the pace of economic recovery.

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When push comes to shove, American companies are dispelling notions we're a country of overindulgent, lazy slobs. They are getting fit, lean, and competitive in the face of recession and as a result, reporting much better-than-expected Q2 earnings and outlooks.

As of last week, 77% of S&P 500 companies having announced Q2 earnings beat estimates—exceeding expectations by a record 19%. But not everyone's cheering the happy results, focusing instead on reported revenue shrinking 2% on average compared to last year. Even this is incredible news. Remember, credit markets didn't freeze and economic activity didn't contract until Q3 2008, so this year-over-year comparison is to a pre-crisis environment. A mere 2% decline in revenues from a year ago is a far cry from the economic collapse widely predicted.

Plus, soft revenue compared to solid earnings is typical at the beginning of most upward cycles. It's even starker today, thanks to more advanced business information systems. Companies may be losing revenue compared to a year ago as sales contract along with the economy. But as we've mentioned, many are still posting profits because today's technology makes it easier and faster to manage inventory, capital expenditures, staffing, and pricing.

Firms trimmed down quickly, contributing to a sharp drop-off in economic activity, but the same technology should allow them to ramp up quickly too—possibly hastening the pace of economic recovery. When economic activity picks up, these lean, efficient companies will likely see big profit increases—and increased profitability will eventually lead to increased spending and hiring. This is a positive.

The heavy tilt toward companies beating rather than missing expectations shows firms aren't in the dire situation many estimated. The fact stock prices have risen in line with companies' positive earnings reports and better-than-expected guidance—and fallen for companies with disappointing results and outlooks—signals the market is starting to refocus on fundamentals rather than reacting broadly and homogenously to macro factors.

All these are signs the market and economy are on the path to normalcy—and have plenty of push to further improve. Some critics may claim companies today are hardly earning, but in fact these are extremely hard-earned profits.

*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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