As the global spotlight falls on America’s first-quarter earnings season, investors are hoping for an economic and earnings recovery later this year. But while US earnings forecasts may have come down, they still look “outrageously bullish”, as Alan Ruskin of RBS Greenwich Capital puts it. John Mauldin of Investorsinsight.com notes that as recently as October, analysts expected the S&P 500 companies to rack up collective earnings per share (EPS) of $55 in 2008 as a whole. The final tally was $14.88. Now EPS are expected almost to double to $28.50 this year.
Yet there is still a great deal of trouble ahead, says Mauldin, especially for the financial sector. The number of mortgages with low introductory interest rates that are set to expire will jump over the next two years, while foreclosures are still rising. We’re also seeing some “real deterioration” in traditional loans. The American Banking Association has a composite index tracking eight types of consumer loan and it shows the delinquency rate has hit a record high of 3.2%. So the earnings recovery, when it comes, will be slow and fitful. Profits are already down 70% from the peak.
America, like the entire world, is still in a deep recession and most economies have only just started working off debt. Its consumers’ savings rate is set to climb for “at least three to four years” as they finally retrench. Tax hikes later next year will also further depress growth. Earnings have a “mountain” to climb to get to new highs. The slow economic and earnings recovery implies “protracted churning in the stockmarket”.