There was a fascinating piece in yesterday's Times looking at an important aspect of the stock market's recovery. The writer, Paul Lim, points out that the surge in many companies' earinings - which has been accompanied by a surge in their stock prices - has been fueled more by cost cutting than by growth in sales. Selling and administrative costs among the S&P 500 companies fell by 5.7 percent in the second quarter of '09 as opposed to the second quarter of '08. But corporate revenues fell by almost 20 percent in the same time period.
Obviously, there's a limit to how much businesses can cut expenses. If these companies don't start increasing sales some time soon, earnings will start to suffer, as will their share prices. (This also helps explain why unemployment keeps rising even as the stock market is showing signs if life.) At some point, revenues will need to rebound.
And when will that happen? Warning: This isn't good news. According to Lim, research says that sales hit bottom and start to turn back upward approximately nine months after a recession ends. If the recession is ending now, that puts the next upward movement in revenues early next summer.
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