Source: USA TODAY
The corporate profit machine may be churning out better-than-expected results, but investors are getting increasingly bothered by companies’ inability to find real growth.
At a quick glance, the first-quarter earnings season appears to be a banner one, now that more than half, 271, in the Standard & Poor’s 500 have reported first-quarter results. These companies are reporting 3.6% earnings growth so far, a big upside surprise given that back on April 1 analysts were only predicting earnings would rise 0.5%, says S&P Capital.
At this, clip companies are expected to report a record pile of corporate profit this year, topping last year’s record, says Howard Silverblatt of S&P Dow Jones Indices. A big driver of the better-than-expected bottom line comes from the fact that 73% of companies have beaten expectations, a powerful surprise that continues a trend in the previous four quarters of bonanza profits, says John Butters of Factset.
But while these headline statistics give a positive view on what has been a big driver behind the market’s powerful rally to new highs, there are reasons to worry the results may not be as good as thought, including:
• Disappointing revenue growth. Investors were hoping by this point in the economic cycle, companies would be able to find growth selling new products and services or tapping new customers. But in the first quarter, revenue is coming in 0.6% lower than in the year-ago period, down from the 0.9% growth expected at the beginning of the year, Butters says. Just 44% of companies have beaten revenue estimates, while 56% have missed, making it the third quarter in the past four with more cases of revenue falling short than coming in better than expected.
• Lingering stagnation from Europe. Much of the revenue weakness is hitting companies that rely most on Europe, says Sam Turner of Riverfront Investment Group. The biggest sources of upside revenue surprises have been sectors like utilities and telecom, which don’t rely on Europe, while large technology and industrials have been hurt most, Turner says. Of the 23 Dow Jones industrial average components to report so far, 15 have missed expectations including International Business Machines, Caterpillar and United Technologies, Butters says.
• Separation of sectors. There’s a wide discrepancy between the earnings growth of various sectors. Telecom is coming in with the strongest growth, up 16.7%, powered by Verizon and Sprint. But technology remains the sole area looking at a profit decline, falling 0.4%, says S&P Capital IQ.
Looking forward, companies aren’t all that optimistic, either. Roughly 80% of the companies that have given guidance have been negative and analysts have cut their profit forecast for the second quarter to 2.4% from 4.5% at the end of March, Butters says.
Ironically, investors see these negative results as a positive for the stock market, which is up 11% this year, since it keeps government stimulus coming, Turner says. “The expectation is that the data is so bad, it’s good, for central banks around the world to keep the foot on the pedal,” he says.
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