In our March 2014 commentary we highlight the importance of corporate earnings to the strength of the economy and the equity markets. The value of revenue growth is discussed as profit margins have already been enhanced by cost cutting and lower capital spending.

1. biegelwaller.com
Slides of the Month – March 2014
Overview: We believe corporate earnings – specifically the level of earnings
growth – is one of the most important factors in assessing the health of an
economy (and accordingly of the equity markets). Understanding that equity
prices are ultimately dictated by earnings, we pay close attention to this
trend. While S&P 500 earnings advanced nicely in Q4, we are monitoring the
durability given what we view as tepid revenue growth. With operating profit
margins at historical highs (and not likely to significantly drive future earnings
growth), we see top line growth as a critical ingredient if equity markets are
to continue advancing.
Experience
Insight
Impact
1

2. An Earnings Update…
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98% of the S&P 500 has reported Q413 earnings, with earnings growth in the area of 8%-9% (as of 3/3/14).
On the other hand, sales growth was less than 1% for the quarter. A continuation of this trend of tepid sales
growth risks derailing the economic recovery.
Experience
Insight
Impact
2

3. Excluding Financials, Q4 Earnings Growth Declines to 5.3%
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•
This chart shows reported sales and earnings growth for the S&P 500 excluding the financial sector.
As we have previously noted, financial sector earnings often include one-time items such as reserve
releases and accordingly, may not always accurately depict economic conditions.
Experience
Insight
Impact
3

4. Dow Jones Industrial Average Earnings
•
All 30 stocks in the Dow Jones Industrial Average have reported Q4 earnings consistent with sub 1%
revenue growth and mid-single digits earnings growth.
Experience
Insight
Impact
4

5. Operating Profit Margins are Already at Historically High Levels
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•
Insight
Profit margins have been
boosted by cost cutting,
tame wage inflation, and
falling depreciation due to
lower capital spending
levels.
•
Experience
Trailing 12-month
operating profit margins
for the S&P 500 are sitting
at historically high levels
and are not likely to drive
future earnings growth.
We see broad based
revenue growth as a
necessary ingredient for
equities going forward.
Impact
5

6. Disclaimer
Opinions expressed in this commentary may change as conditions warrant and is for informational
purposes only. Information contained herein is not intended to be personal investment advice for any
specific person for any particular purpose. We utilize information sources that we believe to be reliable
but cannot guarantee the accuracy of those sources. Past performance is no guarantee of future
performance; investing involves risk and may result in loss of capital. Consider seeking advice from a
professional before implementing any investing strategy.
Experience
Insight
Impact
6