Profit growth in
2014 (and 2015) will be higher than expected, even higher than the bottom up
analysts think. 10%+ in
the US en 20%+ in Europe.
Why is this unlikely according to the consensus:
Hopes spring
eternal: the almost-always-too-optimistic-expectations of analysts. In time
they almost always revise down considerably their forecasts. http://www.businessinsider.com/wall-street-earnings-expectations-errors-2014-1
Why it
should happen.
Profit
growth can be better than expected when the ISM is above 55 in the US,
when economic growth accelerates and when currencies have fallen.
Margins are
very high in the US,
especially compared to the unemployment rate. This is keeping wage growth low,
cost cutting easy and so keeps the squeezing of profit margins away for the
time being. Favourable for profit growth is when capex growth faster than GDP
and when the world trade grows.
The
chart above illustrates that
the high ISM ought to lead to c.15% growth of (IBES consensus) expected
profits.
Above a
chart of Applied Global Macro Research for the macro profit numbers (NFC) of
the US. It shows about 15% profit growth for the
first half of 2014. Profits of the S&P could rise even a bit more because
of buybacks and recovery of profits outside the US. The relations between profits
and output growth, change in output growth, lagged unemployment rates, lagged
productivity growth compared to wage growth, lagged profit margins have been
extremely stable in the past 50+ years in the US.
Profit
growth (NFC) is already accelerating in the US from the low of 2% at the end of
2012 to 8% in Q3 13. So there is no reversal of trend necessary for high profit
growth, only persistence of trend. This makes the prediction of 10%+ profit
growth in the US
a strong conviction call.
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