Disturbingly, analysts now expect record profit margins for U.S. companies by the end of 2010. It’s one thing to expect a recovery, but forecasts may have gotten out of hand.
As Morgan Stanley highlights in their 2010 Global Outlook, given the sky-high margin forecasts, there isn’t much room for positive earnings surprises in 2010 due to higher than expected profitability. If there will be any upside surprises, it will more likely have to come from better than expected sales.
Morgan Stanley: 2010 margins are not likely to beat bottom-up expectations. Our economists are forecasting nominal GDP to exceed its 2007 peak by year- end 2010. This would be consistent with ex financials margins reaching their prior peak level, particularly given the unprecedented cost control through the current cycle. But corporates have been quick to cut costs, and we think at least 80% of the cost out story is done. The surprise on margins is that current expectations are achieved (rather than significant upside relative to expectations). 2010 will be about top line surprise, if any.
[image url="http://static.businessinsider.com/image/4b30c8360000000000d2695a/image.jpg" link="lightbox" caption="" source="" alt="ms" align="left" size="xlarge" nocrop="true" clear="true"]
Yet in terms of revenue forecasts, analysts might actually be a bit too conservative, as shown below. Thus profit forecasts might not necessarily end up incorrect. It might just be that margins come in lower than expected, but sales a bit higher.
[image url="http://static.businessinsider.com/image/4b30c983000000000028a1a7/image.jpg" link="lightbox" caption="" source="" alt="ms" align="left" size="xlarge" nocrop="true" clear="true"]
(Via Morgan Stanley, 2010 Global Outlook, Jason E. Todd, CFA)
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