With earnings season effectively over (474 firms have reported), S&P 500 profit growth averaged 8% — soundly beating consensus estimates of 3.2% — and marking the 11th consecutive quarter of earnings growth.
Not only have earnings grown, but they’ve also beat expectations for 11 consecutive quarters. That analysts still are fairly wide of the mark tells us expectations still are too dour — in part because many continue to fear an impending recession.
In Fisher Investments’ view, such fears are misplaced. First, revenues also have grown for 11 consecutive quarters. While earnings growth can be the result of cost-cutting, revenues are a direct reflection of global demand — and demand has been strong, helped in part by fast-growing emerging markets. Then, too, firms still have near-historic amounts of cash on their balance sheets — an important source of future demand (and fuel for the economy).
Plus, emerging markets how have wide swaths of citizens moving into income levels consistent with increases in spending. That’s good for those citizens, their countries and the countries they trade with.
Many point to weakness in Europe as a potential drag on global growth. The eurozone periphery indeed has issues, but keep in mind, eurozone Q1 GDP was unexpectedly flat — buoyed by surprisingly strong German GDP and resilience in France. The eurozone still could dip into recession, but the eurozone is just about 20% of global GDP. In 1993, the euro area was about 25% of global GDP — bigger relatively than now — and it fell into recession while the world overall grew. What’s more, global stocks rose a healthy 22.5% in 1993 after a flattish 1992 (not dissimilar to 2011).
Regional weakness, even in a region as large as the eurozone, needn’t spell global trouble.
This article constitutes the views, opinions, analyses and commentary of Fisher Investments as of May 2012 and should not be regarded as personal investment advice. No assurances are made Fisher Investments will continue to hold these views, which may change at any time without notice. The mention of any security does not constitute any recommendation to buy or sell that security; rather, it is to illustrate a point. In addition, no assurances are made regarding the accuracy of any forecast made herein. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets.
