Analysts Expect Earnings Growth To Increase In The Second Quarter

According to FactSet for the first quarter of 2014 the S&P 500 companies reported earnings growth of 2.1% and are currently expected to increase earnings by 5.7% in the second quarter, down from 6.9% on March 31. Revenue growth came in at about 2.4% for the first quarter and is expected to be 3.1% in the second quarter. The current 12-month forward P/E multiple is 15.4x.

Over the past four years (2010-2013) analysts have overestimated the second half earnings growth by 43% for the third quarter and 48% for the fourth quarter based on June 1 earnings projections. Earnings growth is again weighted to the second half with 9.6% and 10.1% growth in the third and fourth quarters, respectively. The chart below shows how the earnings projections for the fourth quarter were too high based on the final results.

Source: FactSet

The current P/E 15.4x P/E multiple has become a fair amount higher than the 5 year and 10 year averages of 13.2x and 13.8x, respectively. While the P/E multiple can remain above its average for a significant time, as it should be above its average for about half the time, especially in a low interest rate environment it could be challenging for the market to move significantly higher if revenue and earnings growth are in the low to middle single digits ranges.

Source: FactSet

Analysts are projecting that net margins will break above 10% in the second quarter and continue to increase to 10.8% in the second quarter of 2015. While margins could remain high at some point in time they will have to level off if not decline if labor costs start to rise faster than a business can increase its prices.

Source: FactSet

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