The other cliff is not about taxes and spending

Corporate earnings teetering on the edge, deal or no deal

Dec 5, 2012 @ 3:10 pm

By Andrew Osterland

earnings, fiscal cliff
+ Zoom

Beware the cliff.

Not that one, but the precipice that corporate earnings could be headed for regardless of what happens with current negotiations in Washington on taxes and spending.

The market appears fixated on every twist and turn in the fiscal cliff discussions, but investors may be ignoring a significant deterioration in corporate earnings that could get worse.

“We see three potential scenarios on the fiscal cliff: we go over it, we get a credible deal or they kick the can down the road again,” said Rick Scott, chief investment officer at L&S Advisors Inc., a registered investment adviser managing about $300 million in assets.

“It's a lose, lose, lose scenario if you focus on earnings,” he said. “With any of those outcomes, we think the earnings downtrend exhibited in the third quarter will get worse in the fourth quarter and into next year.”

Corporate profits already have been falling. More than two thirds of companies in the S&P 500 reported lower profits in the third quarter, versus the year-earlier quarter. On average, S&P 500 company earnings were down 1.6%, with 27% of companies beating consensus estimates and 54% missing them, according to research by L&S Advisors.

Mr. Scott said he thinks the profit picture is going to deteriorate further, no matter what happens in Washington.

Without a fiscal cliff deal, the business environment will get worse, and if deadlines are simply extended, the uncertainty for businesses will remain, he said. If a credible deal is reached, austerity measures will kick in.

Mr. Scott is positioning clients in defensive sectors such as pharmaceuticals, health care, food and consumer staples, and is ferreting out companies with positive-earnings momentum.

“It's a stock picker's environment,” he said.

He doesn't discount the possibility that a grand bargain between Democrats and Republicans could temporarily override investor concerns about earnings, but he prefers to play it safe.

“We might see a bounce in markets if we get a credible deal, but eventually, fundamentals will begin to become apparent,” he said. “Once the market discerns what's happening with earnings, stock prices will suffer.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Featured video

Consuelo Mack WealthTrack

Thomas Russo: What it really takes to be a successful investor

Being a successful investor requires the ability to say no and the capacity to suffer, according to Thomas Russo, managing member of Gardner Russo & Gardner.

Video Spotlight

Are Your Clients Prepared For Market Downturns?

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

Jerry Schlichter's fee lawsuits have left an indelible mark on the 401(k) industry

After a decade of litigation, fees are lower and retirement plans are more transparent. But have the lawsuits gone too far?

10 best financial adviser jokes

How many financial advisers does it take to screw in a lightbulb?

With margins crashing, broker-dealers look to merge: report

Increased regulation is straining profit margins among broker-dealers, sending many of them into the arms of their bigger brethren.

Hackers may have profited from SEC breach

The hack of the agency's Edgar filing system occurred in 2016, but the regulator didn't conclude until last month that the cybercriminals may have used their bounty to make illicit trades.

Top 10 financial firms ranked by investor satisfaction

Find out which firm took the top slot for overall investor satisfaction for the second year in a row.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print