Q3 2010 EARNINGS SEASON RECAP

Nearly 90% of S&P 500 companies have released results, with over 60% surpassing top-line estimates while nearly 76%  have beaten on the bottom line.

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S&P 500 (ex-financial) profit margins are near their all-time high. They currently stand at 8.2%, tied for a 30-year record that was last established in June 2007. There has been a noted tendency for margins to cycle around a rising longer-term trend.

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The long-term trend increase in profitability is linked to structural efficiency gains. Corporations have reduced labor’s share of output through time and have obviously made advantageous labor for capital shifts. The historical upward bias in profitability suggests that we could soon see a new all-time high set for profitability. This would offer a near-term positive for profits growth.

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The cyclical thrust behind the improvement in margins might be approaching a peak. The near unprecedented surge in productivity growth, and related collapse in unit labor costs, over the past year is unlikely to be sustained based on simple principles of mean reversion. An upturn in labor cost growth is likely to provide an early warning sign that profitability is nearing its precipice. A peak in profitability is usually associated with slower rates of future earnings growth.

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Q3 earnings will likely total  $21.50, an annualized rate of $86. Company guidance remains strong into the 4th quarter.

RBC Capital Markets

 

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