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What Do 2013 Earnings Estimates and Icarus Have in Common?


Since October, estimates are being ratcheted down as margins show a change in trend, falling for the first time since 2009. Still, full year 2013 earnings remain too elevated.

Margin Peaks -- A Few Examples

Operating earnings margins peaked in the June 2012 quarter at 9.2%, where they also were in the Dec 2011 and Mar 2012 quarters. Now, margins have also started to decline down to only 9.0% in the Sept 2012 quarter. It remains to be seen, but it wouldn't be surprising given the recent earnings cuts that the Dec 2012 quarter will be below 9.0%, setting up a trend of now falling margins.

The same thing happened in 2007 near the previous market peak (NYSEARCA:IVV). Margins hit 9.0% in the Sept 2006 quarter and remained topped out between that level and 9.3% for the next year. Then in the Sept 2007 quarter margins declined to 8.9% and kept falling from there.
The below chart, from Deutsche Bank, outlines the historical cyclical nature of margins. Earnings margins have risen and fallen throughout history, they have hardly been linear, and this is perfectly normal.

I am not one to assume "this time it's different" and am very cautious that earnings and margins at these elevated levels are not sustainable. We have already started to see the cracks forming in earnings, with only 1.2% expected growth over 2011 as well as the first decline in margin rates since 2009.

A continued deterioration of margins would certainly bring down full year 2013 estimates.

Icarus Flew Too High; Earnings Too

Given the market is at 30 year margin highs (matched only at the peak in 2007), competitors are currently stepping in, lowering prices, pressuring margins, and resulting in lower earnings estimates. (See Apple.)

Looking at the above chart, not only do we see the cyclicality of earnings margins but we also see that margins are higher than they have ever been since the early 80's when the data begins. Margins at over 8% are a reason to be earnings cautious, earnings over 9%, those are left for Icarus.

Editor's note: This story by Chad Karnes, CMT, originally appeared on

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