Earnings Growth is Up, but Don't Get too Excited

11/14/2013 11:00 am EST

Focus: STRATEGIES

Jim Jubak

Founder and Editor, JubakPicks.com

Even though companies have exceeded projections for the third quarter, it's not the time to get overly excited about the rest of 2013 or 2014, writes MoneyShow's Jim Jubak, also of Jubak's Picks.

It wasn't much of a hurdle, but it looks like companies jumped it in the third quarter.

With 90% of the Standard & Poor's 500 (SPX) reporting, earnings are up 3.7% year over year for the quarter, according to FactSet. Taking into account estimated earnings at companies that haven't yet reported, earnings are projected to show 3.5% growth in the quarter.

Going into the third quarter, companies were projected by Wall Street analysts to show 1% earnings growth. Among companies that have reported, 69% have exceeded consensus earnings estimates. That's at the high end of the average historical range. Earnings grew by 2.6% year over year in the second quarter.

Third quarter revenues are up 2.9% with 52% of companies beating analyst projections on revenue. Sales grew 1.7% year over year in the second quarter.

The end of the third quarter shifts attention to projections for the fourth quarter. Estimates now call for fourth quarter earnings growth of 7% on sales growth of 0.6%. Estimates almost always come down as earnings reporting season gets closer, so I'd expect fourth quarter estimates to decline as we move through January and February and into March. Three months ago, projections for the fourth quarter called for 10% earnings growth.

Projections now see earnings growth of 5% for the full 2013 year on 1.9% sales growth. If those projections were accurate, 2013 would turn out to be slightly better than the 4% earnings growth in 2012.

Projections for 2014 are now looking at 11% earnings growth and 4.3% revenue growth.

If 2014 earnings come in on those projections, the S&P 500 trades at 14.8 times 2014 earnings.

The likelihood of 2014 projections being too optimistic, however, is extremely high.

Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of any stock mentioned in this post as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund's portfolio here.

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