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The earnings season naysayers are quick to point to Apple’s size and staggering growth rate as key to corporate profit growth during the first quarter.As such, it has become popular to talk about earnings growth ex-Apple, which is far below the inclusive growth rate.
However, it is a mistake to think about earnings by just excluding Apple, argues Citigroup’s Steve Wieting.
“Within this backdrop of high profits and moderate growth, some have asserted that the bulk of the earnings expansion is now merely an idiosyncratic case of a thriving Apple Inc. But 66% of firms reporting 1Q EPS showed increases over the past year, still a quite high ratio of firms that are expanding profits.
“Total operating EPS were 6.6% above a year ago without Apple’s 1Q results included. But the IT firm’s sales come at the expense of other producers competing for consumer dollars, and should not be viewed in isolation as generating a fourth of all profit gains.”
In other words, if you remove earnings from Apple, then you must add some earnings somewhere else.
Wieting further notes that the same mistake would produce the opposite effect if you talked about earnings ex-Exxon, another considerably large force in the S&P 500.
“If one were to pull out Exxon-Mobil’s small profit decline from the total, S&P 500 EPS would have risen 9.9% from the year ago, thus showing no slowdown in profits at all. Yet this similarly distorts the aggregate results.”
Having said that, Wieting acknowledges that earnings growth is decelerating, albeit at a less severe rate than he previously expected.