Financial Insight, Earnings and Taxes By: Dempster R. Cherry

Photo Credit: www.american.com

Photo Credit: www.american.com

As we get closer to finishing out Q4 2012 earnings, we have been seeing a pattern of growth. Can that be sustained into Q1 2013?  With 429 S&P 500 companies reporting for the fourth quarter, 72% have reported earnings above estimates, which places them marginally above the average of 69% recorded over the past four quarters.  In regard to revenues, 66% of companies have reported sales above estimates, which are well above the average of 50% recorded over the past four quarters.  There’s growth and the increase in the growth rate can primarily be credited to upside earnings surprises reported by companies in multiple sectors.  This week the blended earnings growth rate for Q4 2012 is 4.2%, nicely above last week’s growth rate of 3.6%.  For perspective, on December 31, the earnings growth rate for the index was 2.6%.  Looking forward at Q1 2013 earnings, analysts and corporations are unfortunately lowering earnings expectations.  The fantastic performance we saw in January looks to have been made irrelevant as February has kicked the market and the overall economy in the shins, with help from our stellar government performance. Some 72 companies have issued negative earnings per share (EPS) guidance for Q1 2013, while 23 companies have issued positive EPS guidance.  That gives me reason to pause and take a deep breath.  A collection of analysts have also taken down their EPS estimates, as the estimated earnings growth for Q1 2013 has dropped to -0.2% from an expectation of 2.4% on December 31.  The Doom and Gloom crowd are queuing up behind the proverbial velvet ropes, waiting for the party to begin.

The due date for 2012 federal income tax returns is April 15, 2013 so you’ll want to start dragging things together a.s.a.p.; that includes collecting a copy of last year’s tax return, W-2s, 1099s, and deduction records.  If you are unable to file your federal income tax return by the due date, file for an extension.  Filing this extension gives you until October 15, 2013 to file your return. You have until April 15 to make contributions to either a Roth IRA or a traditional IRA for the 2012 tax year. Up to $5,000 ($6,000 if you’re age 50 or older) in one of these retirement savings vehicles is worth considering, since contributing to an IRA can have an immediate tax benefit. That benefit comes in the form of a potential tax deduction–with a traditional IRA, if you’re not covered by a 401(k) or another employer-sponsored retirement plan (if your spouse is covered by an employer plan, you’re considered to be covered as well), you can generally deduct the full amount of your contribution. (If you’re covered by an employer-sponsored retirement plan, whether or not you can deduct some or all of your traditional IRA contribution depends on your filing status and income). If you qualify to make contributions to a Roth IRA (whether you can contribute depends on your filing status and income), the contributions you make are not deductible, so there is no effect on your 2012 taxes. Nonetheless, a Roth IRA may be worth your consideration, as qualified Roth distributions you take in the future are completely free from federal income tax.  In all cases, contact your tax advisor for complete guidance. 

I remain optimistic.  February has been a very interesting month and I suspect that the remainder of the week will hold further drama from the economic calendar (housing, consumer confidence, unemployment rate and jobless claims) and Capitol Hill.  Caution continues to rule the day with a heavy dose of skepticism that our elected leaders will discover the definition of compromise. Have a wonderful week.

 

Dempster R. Cherry

Financial Advisor

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