Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
How Stagflation Effects Stocks - 5th Dec 21
Bitcoin FLASH CRASH! Cryptos Blood Bath as Exchanges Run Stops, An Early Christmas Present for Some? - 5th Dec 21
TESCO Pre Omicron Panic Christmas Decorations Festive Shop 2021 - 5th Dec 21
Dow Stock Market Trend Forecast Into Mid 2022 - 4th Dec 21
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

US Economic Growth and Corporate Earnings Growth Expectations

Companies / Corporate Earnings Apr 06, 2007 - 11:28 AM GMT

By: Hans_Wagner


Investors who wish to beat the market should have a good understanding of the market's earnings expectations. The U.S. economy is slowing and the market has lower earnings expectations for 2007. This will limit the expectations for potential growth in the stock market as investors take a more cautious near-term view. However, global growth in the emerging and BRIC countries should help global companies grow their earnings helping to offset the impact of lower earnings in the U.S.

Many of the large U.S. based companies derive more than 50% of their revenues and earnings from outside the U.S. This could set the stage for a change in the current bull market trend. Joe Ellis has written an excellent book on how to predict macro moves in the market called Ahead of the Curve: A Commonsense Guide to Forecasting Business and Market Cycles .

U.S. Economic Growth Expectations

Let's start with the US economy. Real Gross Domestic Product (GDP) in the US was 2.0% in the third quarter of 2006 and 2.2% in the fourth quarter. Expectations are for this trend of slower economic growth to continue through the first half of 2007. This slower growth translates into slower earnings growth from US based operations, as well.

Corporate Earnings Expectations

Second, corporate earnings for U.S. based companies are likely to hold steady at best, and margins might even decline some. It seems that global competitive pressures are keeping pricing power down and wage gains under control. Slower growth revenue growth creates a difficult situation to grow earnings. As shown in the chart below the market is beginning to recognize the reality of this situation, as earnings estimates are guiding lower. It looks like the fourteen straight quarters of year over year double digit gains are likely over as companies are expected to report single digit gains over the next several quarters at best.

As noted in the chart earnings estimates for the first quarter of 2007 are down to around 5% from over 8% two months ago. Second and third quarter estimates also have fallen to the same area. However, fourth quarter 2007 estimates remain much higher. As usual the Wall Street analysts always tend to overestimate future earnings and look for the hockey stick like return to double digit earnings. I expect these estimates to come down some as the year wears on.

Q1 2007 Q2 2007 Q3 2007 Q4 2007
--S&P 5.3% 6.3% 3.5% 15.6%
--First Call 4.3% 4.4% 6.6%
--One Month Ago (1) 6% 7% 7% 16%
--Two Months Ago (2) 8.2% 8.5% 5.2% 16.2%
(1) Combination of First Call and S&P estimates. (2) First Call forecasts

In the past few years, investors have grown accustom to companies routinely exceeding earnings estimates. In the past few quarters earnings have exceeded estimates by 3 to 5%. With the slow down in the US economy, we can expect more companies to fail to exceed their earnings estimates. As the slower economic growth hits company's revenues, we should expect more earnings warnings and fewer companies beating their estimates. It is even possible the 5% or so current growth in earnings will come down.

The problems with the sub-prime mortgage industry have the potential to slow the economy further. If consumers slow their spending due to inability to generate additional spending money from the refinancing of their mortgages, then we could see some more problems. However, notice that Consumption has been climbing since the second quarter even while residential fixed investment (housing) has stayed negative for three quarters. This is an indication that consumers are not that dependent on the mortgage industry to poser their consumption.

So while the housing and mortgage industries go through a much needed shakeout to remove the excesses they generated, the reset of the economy is holding its own. Many countries in the global economy are continuing to grow at significantly faster rates than the U.S. China is still expected to grow at 8% for 2007, and with their focus on the 2008 Summer Olympics, we should expect them to continue to spend to improve their infrastructure to show the world they are a global player. India continues to benefit from their growth initiatives as well. Other emerging countries are also expected to continue to grow their economies. This growth will have a positive impact on the results of many companies that have significant global operations. This business should mitigate the impact of the U.S. slow down and could even create a few surprises to the up side.

The market is not overvalued at this point. The P/E ration for the S&P 500 is 17 for as reported earnings. This is quite close to the average, so a bear market is not expected for now. Further, interest rates are expected to remain stable, though there will be much speculation on whether the Fed will lower interest rates soon. At this point, my view is they will continue to hold them steady, as they are worried that inflation is higher than their target.


Valuations are reasonable at this point. Using the 5% earnings growth expected for the next two quarters the forward looking operating earnings yield on stocks is 6.6%. This is nicely above the ten year rate of 4.55% on the 10-year bond. This implies that stocks are 30% undervalued. However, a 5% earnings growth is likely to limit the up side for stocks. This may keep gains in the market under control through the traditionally slower spring and summer.

But remember we are not feeling the affects of the global economy more than ever. WE could see new earnings gains that provide a nice upside surprise. We also should remember that in 2004 and 2005 and to a lesser extent in 2006, the market was lower in the first half of each of these years, only to end up with gains on the year due to a nice year-end rally. We could see a similar pattern again.

The Bottom Line

This creates a limited earnings growth outlook for the first and second quarters of 2007. However, we could see a nice economic rebound that helps power the market to solid gains in the second half of the year. As always we need to monitor what happens to see if our thinking is correct. For now I do not see a strong bear case. I do see further market volatility as the market tries to figure out what the economy and corporate earnings will be in 2007.

By Hans Wagner

My Name is Hans Wagner and as a long time investor, I was fortunate to retire at 55. I believe you can employ simple investment principles to find and evaluate companies before committing one's hard earned money. Recently, after my children and their friends graduated from college, I found my self helping them to learn about the stock market and investing in stocks. As a result I created a website that provides a growing set of information on many investing topics along with sample portfolios that consistently beat the market at

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in