Friday, February 19, 2010

Chart of the Day -- Earnings

With fourth-quarter earnings largely in the books (over 79% of S&P 500 companies have reported for Q4 2009), today's chart provides some long-term perspective to the current earnings environment by focusing on 12-month, as reported S&P 500 earnings. Today's chart illustrates how earnings declined over 92% from its Q3 2007 peak to Q1 2009 low -- the largest decline on record (the data goes back to 1936). Since its Q1 2009 low, S&P 500 earnings have surged (up over 600%) and currently come in at a level that has only been exceeded during the latter years of the dot-com and credit bubbles.

Now the question is: how much of the recovery in earnings is due to an economic recovery versus massive corporate cost cutting versus economic stimulus. It may take until Q1 2010 data is released but it is clear stimulus has been cut back and there isn't much cost cutting that can still take place. If next quarter earnings are still strong we can be more confident we have an economic recovery.

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