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Commentary

Are Earnings Coming Back to Earth?

Disappointing sales numbers from this earnings season could be the precursor to a broader decline in earnings.

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Corporate earnings have long been a bright spot during this recovery. Even when everything else in the economy looked bleak, corporations seem to keep delivering better-than-expected news quarter after quarter. But is that turning around? So far in this third-quarter earnings season, we've seen disappointing top-line numbers that could be a sign that the momentum in corporate earnings might be beginning to slow.

All things considered, most large firms handled the great recession fairly well. Faced with collapsing sales and an uncertain future, most managers became very defensive. They cut staffing to the bone, shut down unprofitable divisions, paid off debt, and raised additional capital if needed. These moves not only helped keep the lights on during the worst of the downturn, but they positioned firms well for the upturn. As the economy slowly began to come back, the leaner and more efficient companies were able to consistently boost their margins and surprise investors, even when revenue growth remained anemic. The charts below show just how high corporate profits have reached, and how profits have hit an all-time high as a percentage of gross domestic product. Shaded areas on these charts represent U.S. recessions.

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Bearemy Glaser does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.