One of the most remarkable aspects of the weak U.S. economic recovery has been the exploding rebound in corporate profits.
However, with the economy slowing and with diminishing abilities to cut costs, Wall Street analysts expect corporate profits to decline year-over-year in Q3 for the first time after 11 quarters.
From FactSet’s John Butters:
Based on current estimates, the estimated earnings growth rate for the index for Q3 2012 now stands at -1.6%. There has been a steady decline in the growth rate over the past four months. On March 31, the estimated earnings growth rate was 4.8%. By June 30, the estimated growth had declined to 1.7%. Today, it stands at -1.6%.
It is interesting to note that the price of the index moved in the same direction as the estimated earnings growth rate from March 31 through June 1. During this time, the price of the index fell 9.3%, while the earnings growth rate dropped to 3.5% from 4.8%. Since June 1 however, the price of the index has increased 6.4%, while the earnings growth rate has continued to decline (to -1.6% from 3.5%).
Here’s a chart from FactSet showing how analysts’ Q3 earnings forecasts have deteriorated in recent weeks:
Analysts have a long track record of low-balling earnings estimates. Will it happen again?