Kass: The Earnings Cliff Is Cause for Concern
I explained why I felt the fears associated with those cliffs were overblown and that the market could rally over the balance of the year.
I did, however, stipulate that I was still fearful of the earnings cliff, which will likely constrain the market's upside (albeit, possibly to higher levels for the S&P 500).
And there is nothing that I saw in the third-quarter reports that reduces my concerns:
- 95% of the companies in the S&P 500 have reported third-quarter results.
To summarize, third-quarter 2012 sales growth fell about 0.8% less than consensus, and third-quarter 2012 EPS growth (year over year) was about 1.5 points above expectations (excluding financials). Profit margins are still 200 basis points above trend line and should continue to trend lower in the face of punk revenue growth.
The top-down consensus for the S&P 500 is for 2013 EPS of $108, and bottom-up consensus is $113 -- both these numbers are clearly way too high.
Most strategists on the Street live at about $103-$105 a share, which, from my perch, is too high as well.
I expect that profit margins will begin to mean revert in 2013 and that S&P earnings will disappoint and will likely fall in the $95-$100 a share range next year.
Fears of an earnings cliff are not overblown. While I believe the S&P can rise to 1410-1430 by year-end, a weakening profit trend could cap the upside to the U.S. stock market in early 2013.