Slides of the Month – March 2014

Experience Insight Impact

biegelwaller.com

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.

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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

An Earnings Update…

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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

Excluding Financials, Q4 Earnings Growth Declines to 5.3%

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• 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

Dow Jones Industrial Average Earnings

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• 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.

• Profit margins have been boosted by cost cutting, tame wage inflation, and falling depreciation due to lower capital spending levels.

• We see broad based revenue growth as a necessary ingredient for equities going forward.

Experience Insight Impact

Operating Profit Margins are Already at Historically High Levels

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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

Disclaimer

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