Raj Yerasi, a money manager based in New York, has taken on the unenviable task in the following guest post of arguing the case that the increasing influence of foreign
earnings on corporate profit margins means that the ratio in the chart overstates future mean reversion in earnings:
Not exact matches
For one,
corporate America is in the midst of its best
earnings season in nearly eight years, with
profits on track to grow more than 23 percent.
We first highlighted CLX's strong
corporate governance in 2011 and the strategic focus
on maximizing economic
profit, aka economic
earnings.
On the
profits front, we've developed a number of approaches over the years to understand what drives cyclical fluctuations in
profit margins (see for example Recognizing the Valuation Bubble in Equities and The Coming Retreat in
Corporate Earnings).
Japan's relatively low
corporate profit margins mean a given increase in revenues can have an outsized impact
on earnings.
Corporate America was entrenched in an «
earnings recession,» where
profits for the companies in the S&P 500 had declined (
on a year - over-year basis) for six - straight quarters, the longest such streak since the financial crisis.
A drag
on the banking sector was Sweden's SEB, which tumbled 4.5 percent after reporting first - quarter
profit below market expectations as cautious
corporate customers and a seasonal slowdown hampered
earnings.
Wall Street is placing a pathological over-reliance
on a single year of forward operating
earnings as a complete summary of future
corporate prospects, without any adjustment for the level of
profit margins.
Trading
on Corporate Earnings News:
Profiting from Targeted, Short - Term Options Positions by John Shon — Investing — 4.5 stars, 4 reviews.
U.S. markets got the week off to a good start, with investors enthused with recent
corporate earnings, although financial shares saw heavy selling despite beating
profit projections as investors were focused
on taking
profits after the news.
Prior to 1987, Australian companies were taxed
on corporate earnings, and from these after - tax
profits, would pay dividends.
In his book, titled Adaptive Market, Financial Evolution at the Speed of Thought, behavioral finance authority Andrew Lo argues that market forces other than investor buying and selling behavior (based
on corporate earnings profits)-- such as increased demand from retirement funds — can... Read More
Six years since the book's publication, Shilling's prediction has largely proven correct, with two exceptions:
corporate profits have risen during this time because of an intense focus
on cost cutting; and
corporate earnings per share (EPS) have risen due to financial engineering.