by Michael Tarsala
The Street is too bullish on next year’s earnings, according to Morgan Stanley’s quant research team.
There’s a great post today at Also Sprach Analyst with the nitty-gritty details.
Morgan Stanley measured and weighted 19 different factors that should affect 2013 earnings.
Details are below, as per Also Sprach.
Source: Also Sprach Analyst (via Morgan Stanley, FactSet)
The upshot: Of those 19 factors, 13 contribute negatively to earnings growth. As such, Morgan Stanley concludes S&P 500 companies will earn $98.71 next year, about 17.5% below consensus.
It’s an ambitious and detailed analysis. But here’s a more simplistic argument:
What goes up must come down, as you’ll see below.
This is among the latest from John Hussman, known for predicting the 2008 recession. In late March, he used this chart to make a case for shrinking profit margins going forward.
The blue line shows unprecedented corporate profits on the left scale. And on the right is an inverted scale of profit growth 5 years out.
You can see that going back 64 years, Hussman’s research reflects a strong inverse correlation. When profit margins rise, future profit growth falls. It makes a visual case for declining margins in the future, which could also be a threat to stock prices.
Read this earlier post for more background.
Long-term investors should keep in mind the high yields of stocks relative to bonds; this is not an argument to drop stock investments.
It may, however, make a case for lower-volatility investments over high volatility ones — a strategy recently adopted by Bill DeShurko, manager of Covestor’s Dividend and Income Plus model.
Low volatility also is the name of the game for Joe Ollis, manager of The Everyday Portfolio.
