Record Corporate Earnings Can’t Push S&P 500 to New Highs

It’s safe to say that companies in the S&P 500 Index (NYSEARCA:SPY) have achieved record earnings and profit margins on a quarterly and one-year basis. This analysis is on the heels of third quarter results, which fully exorcises the 2008 credit crisis and reflects the aggressive cost cutting efforts which have been underway since that calamity.

Jobs data released Friday showed a 9 percent unemployment rate, though average profit margins in the S&P 500 (NYSEARCA:SPY) are at a peak 8.9 percent, according to Goldman Sachs Research (NYSE:GS). Goldman’s David Kostin, cites weak guidance from companies during this third quarter earnings for his belief that the S&P 500 will fall to 1200 by the end of the year and end up slightly higher from current levels by the end of 2012 to around 1300.

Companies are sitting on a record cash hoard that they have started to deploy on buybacks and dividends, and have yet to use it to hire more employees. “You want to buy depressed profit margins and sell record ones as it’s a mean reverting statistic,” points out Peter Boockvar, equity strategist at Miller Tabak. “The expectation is that earnings may decline if Europecan’t get out of its own way,” said Karen Finerman, president of hedge fund Metropolitan Capital Advisors.

“In other words, investors aren’t willing to pay as much for these earnings this time around with a possible European recession set to depress the future profits of U.S. multinationals, not to mention gum up the international banking system. The S&P 500, at a price-earnings ratio of 12.1, is near its lowest valuation of the last decade,” according to Yahoo Finance.

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