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Giant Disparities in Q3 Consensus Estimates

We are entering third-quarter earnings season. The good news: profits and margins are high. The bad news: the disconnect between the top and bottom line is huge.

Look at these disparities for Q3 consensus estimates on the S&P 500:

Topline: up 5.5 percent

Bottomline: up 30.5 percent

(Source: S&P)

It's the same for Q4:

Topline: up 4.9 percent

Bottomline: up 27 percent

(Source: S&P)

Eventually if the topline doesn't grow more, we won't be able to keep margins up.

And margins have been great: 8.6 percent in Q3, not far from the record of 9.23 percent in March, 2007.

How have they done it? Companies have squeezed costs out of all ends of the business, but there is only so far this can go.

How to think about this? Look at capital expenditures, one of the prime areas where companies get topline growth. Most capital expenditures in the last year (tech has been a modest exception) have been for maintenance —companies are fixing the bridge, they are not building a new bridge.

But the bridge needs to be rebuilt.

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