Corporate Profits Are The Key

Corporate profits are a lagging indicator. They generally turn down after the economy does. While corporate profits will undoubtedly suffer as  a result of the most recent economic weakness, the extent of the decline corporate profits will be the key.

Last night both Oracle and Adobe reported earnings. I was surprised that both companies profits and outlook were hardly effected by the recent weakness in the global economy. After all, the economic weakness has been ongoing for a few months. While this can still change, it is a positive for the bulls.

Since the last recession there was not much of an expansion and fewer excesses were built up at the corporate level, so corporate profits are not as vulnerable as they usually are heading into a recession. It will likely take a disaster scenario in order to have a severe effect on corporate profits and thereby the stock market. Unfortunately, a disaster scenario is not out of the question.

20 comments:

Anonymous said...

That is one of the main reasons it is hard to see much downside in stocks.  With global GDP projected at 4% next year and corporations generally having strong balance sheets and tight cost controls, it is hard to see a big fall off in corporate profits. 

Plus with valuations on stocks so low, it will take some serious bad news to drive prices much lower.  I also fully believe that every major corporation in the world knows their Greece exposure and every government fully understand their banks exposure to Greece, Italy, etc..  I am also confident that plans are in place to handle a Greek default - it is so obvious and well-discussed, only a completely incompetent board or government finance ministry would not have done so.  That means it will have to be something larger and unexpected to drive a major stock drop.

Tsachy Mishal said...

I believe that the situation in Europe poses a larger threat. I believe it can be dealt with but the EU keeps dragging their feet. If this continues I can see a nastier outcome.

Anonymous said...

Markets have not really paid attention to earnings because of the European sovereign headlines, but 32% of dow jones earnings are from sales to China.

Anonymous said...

I guess that is the key question - has the EU got a plan to deal with this? 

Greek debt really is not that large in the overall scheme of things.  Rather than the EU continuing to funnel money towards Greece, it would probably make more sense to write these debts down and instead funnel the money to the European banks which need capital.  This would spread the problem to the countries which could afford it and avoid throwing good money after bad and take the "Soc Gen" will fail story off the table.

You then get into the issue of whether other countries will not want to pay because Greece did not, but I think the overall cost to the Greek economy and reduction in their access to credit markets will override this.

Tsachy Mishal said...

Where did you get that number from?

Anonymous said...

Read it in bloomberg last quarter.  A good chunk of forward p/e pricing in 9-10% china gdp growth.  Question is, china a bubble?  If so, a significant portion of the US index is.  US has placed alot of chips on growth through exports and weak dollar.

Tsachy Mishal said...

I dont believe that 30% of US corporate profits come from selling to China or anywhere close to that number. You likely misunderstood.

Anonymous said...

Interesting stat: Apple COO Tim Cook said that Apple's expansion into China last year has helped drive revenue gains, noting that the country was "key" to the company's success. In fact, Apple's revenues from China, at $6.33 billion, are closing in on its US results. (Apple posted $10 billion in revenues from "the Americas" in the quarter.)

Anonymous said...

http://www.reuters.com/article/2011/08/18/us-cocacola-china-idUSTRE77H18X20110818

Anonymous said...

US companies are betting the ranch on the BRICS for any growth.

Tsachy Mishal said...

You have not brought any evidence to support your statement that China accounts for 30% of US corporate profits. All you have done is state some anecdotal evidence that proves nothing.

Anonymous said...

I don't understand why your analysis is so myopic.  It seems everyone but you realizes that corporate earnings are rising because of BRIC growth while joblessness and austerity is hitting Europe and USA.

Tsachy Mishal said...

Because if you are going to throw out a statistic than you should tell us your source. Stop evading the issue. I have not argued about BRIC growth or about anything else u have mentioned. I only question the validity of that statistic.

Anonymous said...

anyway the point is, i beg to differ on your opinion that few excesses and expansion has been built up.  s&p corps are betting big on foreign sales in the east.  if that area pops so does the s&p forward estimates.

Anonymous said...

Boeing expects to capture a large chunk of the $600 billion pie and also hopes that small and intermediate twin-aisles, such as the Boeing 787 Dreamliner and 777, will be a significant part of these deliveries. They are expected to constitute over 40% of total sales, with some 1,040 deliveries anticipated.
http://seekingalpha.com/article/292573-boeing-dreams-big-for-china

Tsachy Mishal said...

Anecdotal evidence does not prove that 30% of US corporate profits come from China. I dont have time to respond to your comments anymore.

Anonymous said...

The Boeing Company (BA) bullish on China’s sustained economic growth, increasing personal wealth and ongoing market liberalization values the market for new commercial airplanes at $600 billion over the next 20 years. During this period Boeing estimates that China will require 5,000 new commercial airplanes.The company is already the leading provider of passenger airplanes in China. Per Boeing’s estimates, Chinese air travel demand is growing at an annual rate of 7.6%.

Anonymous said...

My point is that expansion and excesses have been built into forward p/e which differs from your argument which excludes that altogether and that the risks are higher than what you may have tried to communicate.

Anonymous said...

Just read last quarterly earnings reports from all 30 dow components.  I have no time to cut and paste each one of them here for you either.

Anonymous said...

And i didn't say US corporate profits.  I said as a % of total sales in the Dow 30 which are predominantly multinationals.