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Wall Street Expects a Miracle. You Shouldn’t

U.S. corporate earnings are up about 8% during the second-quarter reporting season. But don’t worry: Wall Street analysts predict the growth rate will quicken again soon, reaching a handsome 13% next year.

Stuart Monk / Shutterstock.com

On second thought, worry. A turnaround like that would require, if not quite a biblical miracle, at least an economic one.

Three reasons: First, U.S. economic growth has recently slowed — to 1.5% during the second quarter, according to the earliest of three estimates from the Commerce Department, from 2% in the first quarter and 4.1% in the fourth quarter of 2011. Emerging markets are growing faster than America and Europe, but rates are declining around the world.

Corporate profits depend on many factors, and chief among them is the broad pace of economic growth. But another is the share of economic activity captured by corporations as profits, versus the one captured by workers as income.

That’s the second reason Wall Street’s forecasts look too glib: Corporations are taking a record share of economic activity, and workers, a slim share. In the past, such imbalances have always reversed. It’s not clear whether that pattern will repeat now. But even if it doesn’t, companies can’t be expected to outgrow the economy from here like they have in recent years.

Lastly, even the second quarter’s 8% earnings growth rate is plumper than it should be, due to a lucky contribution from Bank of America. It reported a modest profit during the second quarter versus a giant loss a year earlier on accounting charges.

The bank’s large stock market value gives it outsized influence on S&P 500 results. Without its contribution, earnings would have grown 3%, according to Gregory Harrison, an analyst at Thomson Reuters.

A better gauge of growth for investors is the rate at which revenues are increasing: 0.8% during the second quarter. Without a pick-up in the economy, earnings growth might look similarly feeble in coming quarters.

That’s no reason for panic, but it’s reason for investors to become less brave.

Some stock buyers are lately paying any price for the handful of companies that are still growing healthily (see “Time to Sell Amazon Stock”). Others are paying dearly for “defensive” companies, or ones whose earnings tend to hold up when the economy slows.

But paying a high price for anything now means betting on expectations. Better to put low expectations to work by favoring strong companies whose earnings may dip during a slowdown, but whose shares can now be had for a song (see “For Bargain Stocks, Look to ‘Risky’ Ones”).

Raise a bit of cash, too. The S&P 500 has returned 13% so far this year, much more than it typically returns in a full year. It trades at 14 times trailing earnings, on par with its historical average — but growth looks likely to slip below average for a while.

The latest inflation rate, this year through May, is 1.7%. It will be difficult to top that with short-term safe money, but if the economy remains weak, price growth may slow further. (It has been zero or negative for each of the past three months.)

Savers can find six-month bank certificates of deposit that pay 0.8% and one-year ones that pay 1.1%, according to BankRate.com. By the time those come due, the market may be coming to terms with the fizzling earnings boom, and stock buyers may find some better deals.

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    • By WebOsPublisher

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      Merge icons on tool bar are grayed out. How can I fix this?
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      Merge icons on tool bar are grayed out. How can I fix this?
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      fayeson – 15 Nov 2006 17:19 GMT SignatureFaye RobinsonReply to this Message Peter Jamieson – 15 Nov 2006 18:27 GMTWhich version of Word?Can you confirm/deny that you mean the Mail Merge tool bar?If it’s Word 2002/3, are the first two icons available? If so, that indicates that Word does not think the open document is a mail merge document. That may be because it is not connected to a data source, and you should be able to clcik the second button on the toolbar to make the connection. However, sometimes when you go through the connection process, Word actually fails to make a connection but reports no error. if that’s what is happening, a. what is the data source? b. you can verify that the toolbar /usually/ works by creating a very simple data source (e.g. a Word document containingk,t1,text1) and trying to connect to that.Peter JamiesonReply to this Message
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    • By WebOsPublisher

      SUDDENLY VOLUME,NETWORK AND POWER ICONS DISSAPPEARED FROM NOTIFICATION AREA. IN THE TASKBAR & START MENU PROPERTIES ONLY CLOCK GIVES OPTION TO HIDE OR SHOW. REST 3 ICON NAMES ARE DULL (NOT
      NOTIFICATION AREA – Microsoft Community
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      Question
      KAMAL ARYA
      asked on
      January 5, 2011
      NOTIFICATION AREA
      SUDDENLY VOLUME, NETWORK AND POWER ICONS DISSAPPEARED FROM NOTIFICATION AREA. IN THE TASKBAR $ START MENU PROPERTIES ONLY CLOCK GIVES OPTION TO HIDE OR SHOW. REST 3 ICON NAMES ARE DULL (NOT HIGHLIGHTED/ACTIVATED) $ I AM UNABLE TO TURN THEM ON. WOULD ANYBODY
      HELP?
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      SpiritX MS MVP
      replied on
      January 5, 2011
      MVP
      Community Moderator
      Community Star
      Hi,
      1st Please Reboot so nothing is interferring with this process.
      Right Click Taskbar – Properties – Notification Area tab – check Volume box – if it is grayed out
      then use this link. (Same for Power, Clock, and Network.)
      How to Enable or Disable the Notification Area System Icons in Vista (there are several methods
      and you may to use all).
      vistax64.com/tutorials/106787-notification-area-system-icons.html
      If needed : a Mr Fixit
      System icons do not appear in the notification area in Windows Vista or in Windows 7 until you
      restart the computer
      support.microsoft.com/default.aspx/kb/945011
      Hope this helps.
      Rob Brown – MS MVP – Windows Desktop Experience : Bicycle – Mark Twain said it right.
      Rob Brown – Microsoft MVP – Windows Expert – Consumer : Bicycle – Mark Twain said it right.
      Reply
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      Answer
      A. User
      replied on
      January 5, 2011
      SUDDENLY VOLUME, NETWORK AND POWER ICONS DISSAPPEARED FROM NOTIFICATION AREA. IN THE TASKBAR $ START MENU PROPERTIES ONLY CLOCK GIVES OPTION TO HIDE OR SHOW. REST 3 ICON NAMES ARE DULL (NOT HIGHLIGHTED/ACTIVATED) $ I AM UNABLE TO TURN THEM ON. WOULD
      ANYBODY HELP?
      Use this tutorial:
      vistax64.com/tutorials/106787-notification-area-system-icons.html
      Take Method Three. It applies to all versions of Vista and it is the easiest method.
      Make sure you re-start the computer afterwards to complete the tutorial procedures.
      Here is another tutorial. This one is from Microsoft Support.
      It has a ” fix it for me ” application and a ” I’ll fix it myself ” instructions.
      support.microsoft.com/kb/945011
      For the benefits of others looking for answers, please mark the suggestion as Answered if it solves your problem.
      Reply
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      Found this helpful
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      Answer
      A. User
      replied on
      January 5, 2011
      SUDDENLY VOLUME, NETWORK AND POWER ICONS DISSAPPEARED FROM NOTIFICATION AREA. IN THE TASKBAR $ START MENU PROPERTIES ONLY CLOCK GIVES OPTION TO HIDE OR SHOW. REST 3 ICON NAMES ARE DULL (NOT HIGHLIGHTED/ACTIVATED) $ I AM UNABLE TO TURN THEM ON. WOULD
      ANYBODY HELP?
      Use this tutorial:
      vistax64.com/tutorials/106787-notification-area-system-icons.html
      Take Method Three. It applies to all versions of Vista and it is the easiest method.
      Make sure you re-start the computer afterwards to complete the tutorial procedures.
      Here is another tutorial. This one is from Microsoft Support.
      It has a ” fix it for me ” application and a ” I’ll fix it myself ” instructions.
      support.microsoft.com/kb/945011
      For the benefits of others looking for answers, please mark the suggestion as Answered if it solves your problem.
      Reply
      Reply with quote
      Report abuse
      Found this helpful
      Me Too
      0
      Answer
      SpiritX MS MVP
      replied on
      January 5, 2011
      MVP
      Community Moderator
      Community Star
      Hi,
      1st Please Reboot so nothing is interferring with this process.
      Right Click Taskbar – Properties – Notification Area tab – check Volume box – if it is grayed out
      then use this link. (Same for Power, Clock, and Network.)
      How to Enable or Disable the Notification Area System Icons in Vista (there are several methods
      and you may to use all).
      vistax64.com/tutorials/106787-notification-area-system-icons.html
      If needed : a Mr Fixit
      System icons do not appear in the notification area in Windows Vista or in Windows 7 until you
      restart the computer
      support.microsoft.com/default.aspx/kb/945011
      Hope this helps.
      Rob Brown – MS MVP – Windows Desktop Experience : Bicycle – Mark Twain said it right.
      Rob Brown – Microsoft MVP – Windows Expert – Consumer : Bicycle – Mark Twain said it right.
      Reply
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