Stock Market Rally: Earnings OK, but Revenue Growth in Trouble

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OK, I've waited a respectable amount of time before sounding the alarm, but with 30 percent of the S&P 500 reporting, it's clear there is a trend developing. Revenues are in trouble.

I said revenues, not earnings. Earnings are continuing to grow, though at a much slower pace than the last several years. We will likely again see record earnings growth in 2013.

But revenue? Growth has been anemic for over a year, and it appears to be getting worse. Here's a table with year-over-year revenue growth rates for the past couple years:

  • Q1 2011: 9.1%
  • Q2 2011: 12.0%
  • Q3 2011: 11.4%
  • Q4 2011: 10.1%
  • Q1 2012: 5.9%
  • Q2 2012: 5.7%
  • Q3 2012: 0.4%
  • Q4 2012: 4.7%
  • Q1 2013: 2.9% (Estimate)

Source: S&P Capital IQ

Pretty notable deceleration, eh? And so far, for Q1 to date, only 39 percent of companies are beating on the top line, far below the historic average of 61 percent. If this keeps up, that 2.9 percent estimate for Q1 above will be closer to one percent by the end of the quarter.

How is this happening? Why are earnings still holding up, but revenues aren't? It's simple: companies can "manage" their bottom lines a lot easier. There's a lot of ways (cost cutting, taxes, etc.) you can get there. But the top line? The top line is more transparent and a lot more difficult to hide troubles.

This, of course, impacts the broader economy...particularly job growth. Companies aren't going to hire more if they don't have more revenues.

The market is taking note. Revenue misses today by Whirlpool (WHR) and Procter & Gamble (PG) and AT&T (T) are weighing on all those stocks. They are not alone: there's been revenue misses recently from American Express (AXP), eBay (EBAY), Verizon (VZ), Ryder (R), Dover (DOV), and Wells Fargo (WFC). And that's just a short list.

The usual retort to this is that ultimately, what you are paying for is earnings, not revenues, and the market looks just fine with roughly five percent earnings growth. That's true, but anyone who thinks we are going to get endless earnings growth with no revenue growth is simply kidding themselves.

What about stocks? We are in a blind spot right now. The macro figures worldwide are weaker, but the central banks are buying time. Look at today: lousy Europe PMI numbers, lousy U.S. Durable Goods...and Europe ended at the highs for the day, and in the U.S. cyclicals (energy, materials, industrials) are all leading.

By CNBC's Bob Pisani

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