Profit gain is weak, but it’s not all bleak
Corporate earnings growth weakened in the fourth quarter of 2006 to the slowest pace in four years, and the gains are expected to get even skimpier in the months ahead.
But the stock market so far is taking the fading of the profit boom in stride. With major stock indexes at or near record highs, investors may be taking a longer view, figuring that an earnings slowdown this year could give way to a pickup in 2008.
That would fit with the economic “soft landing” scenario.
Earnings underpin stock prices, and the spectacular profit surge in recent years has been a key factor in lifting the market from its 2000-02 plunge.
The corporate bottom line has been boosted by rising sales amid a strong global economy. Many U.S. companies also have kept a sharp eye on expenses to keep earnings marching higher at double-digit percentage rates since 2002.
But that streak may have ended last quarter. Growth in operating earnings for the blue-chip Standard & Poor’s 500 companies now stands at 9.8% for the fourth quarter compared with a year earlier, with reports in from more than 80% of the firms, said Howard Silverblatt, who tracks earnings at S&P; in New York.
If the final number fails to crack the 10% threshold, it would be the first time in 19 quarters that earnings haven’t risen at a double-digit pace, according to S&P.; Operating earnings are results before one-time gains or losses.
Growth is expected to decelerate further this year. S&P; estimates that blue-chip earnings will rise just 5.7% in the current quarter, 7.1% in the second quarter and 4.2% in the third.
The S&P; 500 index includes the nation’s largest companies.
The slowdown in the U.S. economy, particularly in the housing and auto sectors, is one factor weighing on profit gains. Although the government initially estimated that the economy expanded at a 3.5% annualized rate in the fourth quarter, that’s expected to be revised down to between 2% and 2.5%, Bank of America economists said in a report Wednesday.
The overall earnings growth figure for the S&P; 500 companies in the fourth quarter also was pulled down by weakness in energy companies’ results, as oil prices slumped.
The energy sector had been a major contributor to the profit boom since 2003, but earnings of energy companies in the S&P; 500 fell 10% last quarter from a year earlier, according to data firm Thomson Financial.
On the plus side, the global rally in stocks and soaring merger activity have fueled hefty profit gains for brokerages and other major financial-services companies. That sector of the S&P; 500 posted a 27% year-over-year jump in earnings last quarter, S&P; said.
Brokerage firm Goldman Sachs Group Inc. earned a record $3.1 billion in the fourth quarter, nearly double its results in the same quarter of 2005.
Some retailers also had better-than-expected results. Manhattan Beach-based Skechers USA Inc., a manufacturer and retailer of casual shoes, on Wednesday said a 36% jump in sales boosted earnings to $14.6 million, or 33 cents a share, in the quarter that ended Dec. 31, up from $5.9 million, or 14 cents, a year earlier.
The company had been expected to earn 31 cents a share.
The decline in gasoline prices from their summer peaks has left consumers with more to spend, said Rick Campagna, a portfolio manager at money manager Provident Investment Counsel in Pasadena.
“The lower-end consumer seems to be doing a little better,” he said. He expects that turnabout to help some retailers and restaurant chains this year.
Still, many analysts say a broad slowdown in profit growth in the first half is virtually certain, assuming the U.S. economy stays on a moderate growth track.
“I really don’t see anything that could make a big difference” in the outlook for decelerating earnings growth, said Ashwani Kaul, senior analyst at earnings tracker Reuters Estimates.
In the current quarter, just three of the 10 broad industry sectors in the S&P; 500 are expected to post double-digit growth: technology, telecommunicatons and basic materials.
In part, many companies will be running up against tough comparisons with the robust results they recorded in the first half of 2006. “You can’t expect it to go on forever,” Kaul said of the double-digit growth streak.
Even so, he said, any growth in earnings would come atop results that already are at record levels, which means companies overall still would be raking in huge sums.
But with stock prices flying high, could investors stay happy with single-digit profit gains?
Many analysts say an earnings slowdown won’t come as a surprise to Wall Street.
A Merrill Lynch & Co. survey of 206 money managers this month showed that 61% believed it was “fairly unlikely” or “very unlikely” that global corporate earnings growth would be 10% or greater in the next 12 months.
Many investors appear to be buying into the soft-landing view of the economy -- the expectation that two years of interest rate hikes by the Federal Reserve have damped growth for the near future, but that a pickup will follow later this year or in 2008.
The economy went through soft landings in the mid-1980s and mid-1990s, both of which led to a new surge in earnings, and stock prices, in the latter halves of those decades.
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