It’s one thing to see profits rise as revenues rise.
It’s a whole other thing to see profits rise as revenues fall.
The latter is what’s going on in America’s largest corporations. They’re telling us revenue growth is negative. Yet profits, as measured by earnings per share, are on the rise.
This is happening thanks to a combination of fatter profit margins and stock buyback programs the have reduced outstanding share counts.
And these fat profit margins have come at the cost of the American worker, who is either now unemployed or being squeezed to produced more than normal.
Intuitively, this is not sustainable. Eventually, corporations will need its customers to start buying more.
Here’s some more colour from FactSet’s John Butters:
At just past the mid-point of the Q1 earnings season, 73% of S&P 500 companies have reported EPS above the mean estimate. This percentage is consistent with the average over the previous four years (73%). As a result, the earnings growth rate for the quarter has increased to 2.1% today from -0.7% at the end of March. In fact, the earnings growth rate for the first quarter is back to the levels expected at the start of the quarter (2.1%).
However, only 44% of S&P 500 companies have reported revenues above the mean estimate to date. This percentage is below the average of 57% over the past four years. As a result, the revenue growth rate has declined to -0.6% today from 0.4% at the end of March and 0.9% at the start of the quarter. If the final revenue growth rate for the quarter is -0.6%, it will mark the second time in the past three quarters that the S&P 500 will have reported an aggregate year-over-year decline in revenues.
“It is interesting to note that the market does not seem to be reacting negatively to the unusually high percentage of companies reporting revenue below analyst expectations and the falling revenue growth rate for the quarter,” notes Butters. “Since March 29, the price of the index has actually increased by 1.0% (to 1585.16 from 1569.19).”
Here’s the chart from FactSet. The green line shows how Q1 sales growth expectations have only deteriorated.