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A few months ago our 2015 forecast emphasized several points we began making late last year. Taken together, those points differed dramatically from the prevailing wisdom of the time. As we begin May, they are falling into place.
- The US corporate earnings cycle peaked in the third quarter of 2014, and will trend lower in 2015. Declining profits will be driven by the combination of an overvalued dollar, lower average oil prices, and rising wages.
- The rapid appreciation of the US dollar during the last year which was widely expected to continue in 2015 is peaking in the first half. The dollar will decline later in the year.
- Energy prices, which plunged in late 2014 and were generally expected to fall further this year, are bottoming in the first half of the year. Energy prices will end 2015 at levels higher than they started.
- US economic growth will decelerate in 2015 rather than accelerate as was widely assumed.
- A tightening labor market (driven by baby boomer retirements) is pushing wages higher. Rising payroll costs will reduce profit margins going forward.
- One of the biggest boosts to corporate bottom lines in recent years – reducing corporate tax bills by stashing profits abroad - may be coming to an end.
Aggregate growth in US corporate earnings has been meager for several years. The perception of rapid growth is the result of a rising “earnings per share” resulting from massive share buybacks that reduce the total number of shares outstanding. While reducing the number of outstanding shares has legitimately increased the value of each remaining share, the recent downturn in actual corporate profits reduces the ability of corporations to finance more future buybacks. When shares are cheap, earnings are rising, and interest rates are falling, buybacks offer the prospect of substantial long-term gains. Currently, shares are expensive, earnings are falling, and interest rates are rising (although rates will temporarily drop when stock prices suffer a major setback).
Growth in aggregate earnings has slowed to the point that earnings per share are declining, despite the fact that buybacks now represent a record percentage of shares traded. Perhaps even more importantly, a significant portion of the buybacks have been financed by the issuance of a record levelof corporate debt. The financial engineering that has maintained the appearance of rising earnings can no longer be sustained.
2.18.15 - Annual Forecast
12.17.14 - The New Paradigm for Global Markets
10.9.14 - Markets Rolling Over
5.30.14 - Bank Lending and Economic Growth
2.20.14 - February Flash Update
1.15.14 - 2014 Annual Forecast
12.10.13 - Bursting of the Bond Bubble
11.13.13 - A New Top for Stocks?
7.23.13 - Bursting of the Bond Bubble
5.9.13 - The TINA Hypothesis
4.15.13 - The Bernanke Illusion
3.15.13 - US Economic Outlook
2.1.13 - 2013 Annual Forecast
12.10.12 - Tax Reform: A First Step
9.17.12 - QE3
5.1.12 - All the Good Ones Are Taken
3.12.12 - March Flash Update
2.23.12 - February Flash Update