Roundtable: Profit outlook is cloudy but stocks are cheap
— -- The outlook for corporate earnings next year is cloudy because of Europe's debt crisis and a slow-growth U.S. economy. Analysts polled by S&P Capital IQ expect companies in the Standard & Poor's 500 to earn $107.28 a share in 2012, up 8% from $99.01 this year.
Q: Is there a big risk that profits will tumble sharply? If so, what would be the cause? Would it take a shock to the system?
Doll: My vote: It has to be a shock. Most people believe that profit margins can hang in there. And if they do, and nominal growth is OK and we get a little bit of revenue growth, earnings will be OK. But profit growth will continue to slow. Earnings will be up around 16% this year and were up roughly 30% in 2010. It will probably be a single-digit number next year.
Bernstein: That is the key thing: Profit growth has been slowing. Could they tumble? You need a recession or a big shock. You don't usually see huge profit recessions without something causing that. And you know, eventually comparisons get easier and the profit cycle begins to heat up again.
Warne: Remember that the cost of commodities was really high the first half of last year, and those have all come down. So you've basically got a tailwind from lower input costs for any of the commodity-using industries. That will help earnings next year.
Q: Ann, you meet with a lot of managements. What's your take on earnings?
Miletti: Yes, I am on the road often, visiting with management teams of the companies that we invest in. And I see a lot of discipline. After living through the 2008-09 financial crisis, companies are operating with some level of fear about the global economy. But that discipline is really helping them protect profit margins.
We have not had a big enough recovery to create any bubbles in the U.S. since the financial crisis here. You are seeing a lot of discipline. That gives me a lot of confidence that companies are not going to do outrageous, silly things, and that they can sustain profit margins, unless there is a shock.
Q: So American businesses' get-lean strategy after the financial crisis is paying off?
Doll: This is part of the Corporate America story that most of us are seeing: the ability to get more out of the supply lines, the distribution chains, out of technology, out of their people. And they are still cutting costs. They are nipping and tucking. They are not going to stop as long as they have this fear that it might go bad due to (negative news) out of Washington, D.C., or Europe.
Warne: We are also seeing companies stay lean and mean. And that means revenue growth is dropping to the bottom line and creating really good earnings growth. (Analysts expect revenue growth to slow to about 3% in 2012 vs. growth of more than 10% in 2011, according to S&P Capital IQ.)
Stock prices remain relatively cheap
Due to all the fears, stock prices haven't really shot up very high considering corporate profitability remains robust. By at least one valuation measure, the price-earnings ratio, the broad U.S. stock market is selling below its historical average.
Is the U.S. stock market cheap?
