About Me

Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Thursday, April 22, 2010

Earnings In Longer Term Perspective

Since the end of WW2, cyclical expansions in corporate profits have
averaged 4.2 years. The band around the average is wide and there
have been observable "double dips" in profits even during ongoing
economic expansions and stock bull markets.

If the current cyclical recovery / expansion of profits meets the
average for the postwar years, then profits could well expand into
2013. The stock market tends to make cyclical tops around the time
profits are cresting. Thus, if the current uptrend in profits is an
average one, it would be fair to say that the stock market would also
make a cycle top in early 2013.

If the cyclical rise of profits is decently normal, then SP 500 profits
could peak around $115 - 120 in 2013, and the stock index could
rise another 60+% from current levels.

The object of this post is not to make earnings or stock market
projections, but to get you the reader to maintain an open mind and
to do your homework as an investor. Look, earnings might grow only
through 2011 before cresting, or profits could expand to early 2016.
Neither development would be a "black swan." In a similar vein,
earnings could experience an average expansion but the p/e ratio
could be sharply crimped by accelerating inflation or, we could
see a little bubble up in p/e on development of a goldilocks mentality.

My own view is that the economy has the potential to expand out to
2016, but that the ride will be bumpy as there is likely to be a
cyclical acceleration of inflation and higher interest rates to contend
with.

But, it is important for you to have a reasonable plan and to be set
to change strategy as your risk tolerance allows when events start
to deviate from plan as they often do. (Risk tolerance is an objective
measure, but it is best defined in terms of each investor's particular
circumstances, both financial and emotional.)

For now, with the economy in the early stage of recovery you should
open up your thinking to include the possibility of much higher profits
over the next few years, even if such a thought seems to be almost
impossibly close in time to the economic free-fall of 2008.

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