The Problem Of Pulling Forward Sales & Revenue

There is a problem of pulling forward sales and revenue when it comes to future outcomes.

Currently, analysts are incredibly exuberant about earnings for the S&P 500 index. In just the last month, they sharply increased 2021 earnings. The chart below shows where 2021 estimates were in January 2020 versus the previous two months.

Problem Pulling Forward Sales, The Problem Of Pulling Forward Sales & Revenue

The near $20 jump in EOY estimates for 2021 over the last month is highly optimistic. The increase was a function of expectations for a “sugar rush” of economic activity from the stimulus. Of course, after the surge, the growth rate of earnings quickly fade.

Problem Pulling Forward Sales, The Problem Of Pulling Forward Sales & Revenue

But are analysts too optimistic?

 

A Fading Support

One of the potential issues over the next few quarters is 3-successive rounds of financial stimulus led to a spending spree by recipients.

Problem Pulling Forward Sales, The Problem Of Pulling Forward Sales & Revenue

Retail sales make up roughly 40% of Personal Consumption Expenditures (PCE). Importantly, PCE comprises almost 70% of the GDP calculation.

Problem Pulling Forward Sales, The Problem Of Pulling Forward Sales & Revenue

Given that recipients likely spent the bulk of their stimulus, and each dollar spent has a smaller impact on growth, the rate of change is slowing. With no more stimulus in the pipeline, and other supports fading this year, economic growth will slow to the rate of wage growth.

Problem Pulling Forward Sales, The Problem Of Pulling Forward Sales & Revenue

The problem with all stimulus is that it does not lead to productive activity in the economy.

Therefore, the question becomes, “what happens next?”

Pulling Forward Future Sales

 

I have shown the following chart previously. It shows the cumulative increase from 2007-present of the S&P 500 index compared to sales and economic growth.

Problem Pulling Forward Sales, The Problem Of Pulling Forward Sales & Revenue

Notably, the outsized growth of the market reflects repetitive interventions into the financial markets by the Fed. Those interventions detached financial asset growth from their long-term correlation to GDP growth, where corporate revenue comes from. Historically, when the S&P 500 becomes detached from economic growth, a reversion occurred.

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Comments

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William K. 1 month ago Member's comment

The obvious question in my mind is how big are the lies being projected as a wonderful future? Claims devoid of veracity do smell a bit "off" by my cynical standards.

Seth Golden 1 month ago Contributor's comment

So disgustingly unqualified.