Jeffrey Kleintop on Profit Growth Deceleration

Jeffrey Kleintop is the Chief Market Strategist at LPL Financial, today he’s out with a piece discussing his expectations for earnings season.  I found this bit on the slowdown in profit growth to be very important to keep in mind…

Profit Margins

The analyst consensus forecast of 3% earnings growth in the first quarter is the slowest growth rate since the recovery in earnings began in 2009. The weakness stems from the end of profit margin expansion. Analysts expect earnings to track revenue growth of about 4%.

Over much of the past few years, companies were able to post earnings growth rates that were several times the pace of revenue growth as profit margins expanded, granting more profit per dollar of sales. However, the ability to post faster earnings growth than revenue growth has faded; rising costs have contributed to slower earnings gains relative to revenue. In fact, nearly a quarter of S&P 500 companies are expected to report a year-over-year drop in earnings per share despite year-over-year revenue gains in the first quarter. Three sectors are expected to post earnings declines despite revenue growth. The most dramatic of these is the Materials sector, where 5% revenue growth is expected to accompany a -15% decline in earnings.

Chart 2: Slowing Revenue and Earnings Growth

S&P 500 Revenue and Earnings per Share Growth Rates

Source:  LPL Financial, FactSet Data Systems, and Thomson Reuters

You can follow Jeffrey on Twitter as he is one of the brokerage firm strategists who actually gets it.  I highly recommend:

@jeffreykleintop