Fortune: Projections of Corporate Profits Are a Big Lie

Monday, 09 Jan 2012 12:52 PM

By Michael Kling

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Projections of corporate profits are a big lie, and executives will take stupid actions this year, including accounting fraud, to meet the impossible numbers, predicts a Fortune senior editor.

Corporate profits expectations are "insanely optimistic," writes Geoff Colvin, Fortune senior editor at large. Investors will lose big time when reality finally catches up to them.

Predictions of outlandish profits and never-ending expansions followed by stock market crashes are nothing new, Colvin notes. It happened in 2006, 2007, and in the late 1990s.

Now analysts are predicting profit growth in the double digits. Not likely, according to Colvin. Corporate profits are already near 10 percent of GDP. That's near their post-World War II high and the top of the last boom. The postwar average is about 6 percent.

Profits cannot increase faster than the economy, Colvin says, noting that the World Bank predicts worldwide GDP growth of 3.6 percent for 2012.

Analysts tend to fall in love with companies they're covering and predict fantastic growth for them, he writes. Even if they are sometimes right, their predictions are for individual companies, not the entire market.

Company executives trying to meet unrealistic expectations will make matters worse by taking stupid actions, Colvin predicts. They'll cut expenses that pay dividends later, such as research and development, marketing and training. They'll perform corporate accounting tricks and even accounting fraud.

Companies could lower their profit predictions to reduce the pressure on management, he adds, but that's not happening.

Citing record profits and an improving US economy, analysts at Oppenheimer & Co. and Citigroup are bullish on stocks this year, according to Financial Post. But overall, analysts predict the S&P 500 will increase 6.4 percent in 2012.

Forecasters say increasing company profits, low interest rates, and an improving economy will boost the stock market. However, that's what they said a year ago, and the S&P 500 was essentially flat for the year.

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