3Q Profit Expectations & The Economy

Yesterday's Wall Street Journal's Money & Investing section featured a lead article concerning third quarter performances of US companies, entitled "Profits Poised to Surprise Again."


To my own surprise, the piece suggested an analysts' convergence on predictions that third quarter profits will beat expectations. Of course, there are many assumptions tied to that statement.

First, everyone is conveniently basing this anticipated performance on long-ago expectations. First quarter profits, though negative, were couched as being not so bad as expected, thus the equity rally beginning in March. Same thing with the second quarter profits.

Second, everyone accepts that these profits to come are going to be less than last year's in the quarter. But, again, the focus is on expectations. Earlier expectations.

Never mind that these analysts probably raised their true expectations of this quarter by, say, May of this year.

Then we have a fairly narrow focus on profits, although we just saw last quarter's performance come in on flat to lower revenues. On this point, there is a sort of vague punt to various pundits claiming and end to the recession, therefore, sales must go up. QED.

Even so, sales aren't expected to top last year's third quarter. So one analyst is cited as advising clients to go long in US equities until mid-2010, then batten down the hatches for an equity market decline.

All of which leaves me seeing this as nothing so much as a giant recommendation to time the market. That seems to me a foolish thing to suggest to retail investors.

What disturbed me about this article was its sunny outlook on relative performance of this past quarter's equities, rather their absolute performance from a long term perspective.

It very much bears on and is part of the question as to whether the US economy is in a recovery, or simply no longer collapsing as fast as it was a 12-18 months ago. Or whether, if not collapsing anymore, it is really growing at any significant rate. And on what basis- profits, or revenues?

Given most analysts' historic track record at being wrong on earnings estimates, and not really focusing on revenues much at all, I'm less than excited by this Journal piece. I think it shows that too many people continue to observe too narrowly and for too short a term, leaving the equity markets easily subject to rapid reversals of sentiment when the larger, longer term realities differ from one quarter's profits.