U.S. corporations have performed extremely well during the recovery from the 2008 financial crisis. Profit margins and earnings growth have remained at record levels, despite weak global growth and a number of other macro threats. A period of robust earnings growth is typical following a recession due to a surge in productivity, which generally lasts from one to two years once the economic recovery begins. The current cycle is fairly typical in this respect, and after two years of expansion,
productivity growth stalled.
Earnings growth has been a bit more durable than productivity growth, but it too is now beginning to look vulnerable.
Estimates for 2012 second quarter earnings have been trimmed steadily since mid-2011, and expectations have dropped sharply in recent weeks as some early reporters have surprised on the downside. It will be important for investors to correctly assess whether this slowdown is a temporary aberration, or a sign that the three-year-old bull market is turning sour.