Can companies continue to post record profits?
— -- Q: Is corporate profit growth expected to maintain its record-breaking levels next year?
A: Despite the stock market's woes and a slow job recovery, companies' profits are on a tear.
Companies set another record for quarterly earnings in the third quarter, topping the previous record set in the second quarter, S&P Capital IQ says.
Companies in the Standard & Poor's 500 index reported operating earnings of $25.38 a share. That's up 2% from the previous record of $24.86 a share in the second quarter and up 17.7% from the same period a year ago. The third quarter marked the eighth-consecutive quarter of double-digit percentage earnings growth.
But all that's ancient history. Investors, as they should, are always looking forward to the next year or quarter. Investors aren't paying for earnings the company posted in the past, but what they are expected to post in the future.
And it's the future that looks a little less certain as the months pass. Analysts continue to scale back their profit forecasts for the fourth quarter. At the start of the year, analysts thought companies would post 16.5% earnings growth for the fourth quarter, S&P Capital IQ says. But that's been steadily chopped down to 9.8%.
It's a similar story for next year. Investors in July expected earnings growth next year of 13%. But currently, they've cut their growth forecast to 8.7% for 2012.
The fact analysts are less optimistic for the fourth quarter and 2012 is clearly a depressant for stocks. Concerns about the U.S. economy, the global economy and companies' ability to keep posting strong double-digit earnings growth is putting a damper on stock prices. And with expectations falling, stock prices certainly need to come down to factor in lower profit forecasts.
While growth expectations may be subsiding, investors are still expecting record profits. Even if profit next year increases by 8.7%, that's still going to represent extremely strong, and record, corporate profits.
Meanwhile, if recent history is any example, companies might have no difficulty beating the lowered expectations. If that happens, some of the concern of slowing growth may prove to be overblown. For instance, investors had cut their profit growth forecast for the third quarter to 13.5%, and companies had no difficulty topping that. Another repeat performance like that and bulls' hope for 2012 could be better than expected, too.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz
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