Solid earnings reports are anticipated
The stock market has begun the new year with a good start -- and investors are looking to corporate profit reports that will start coming out today to give the nascent rally some legs.
The fourth-quarter results are expected to be solid, if not spectacular. Average earnings of blue-chip companies (excluding financial firms) are projected to rise 8% over the year-earlier period, according to researcher Thomson Reuters.
The average increase for companies in the Standard & Poor’s 500 would be far higher -- 184% -- with banks and other financial firms in the mix, reflecting how badly that sector was faring during the 2008 financial crisis.
Overall, the expected rise in earnings reflects corporate America’s relentless cost-cutting over the last year, including seemingly endless rounds of layoffs. In most cases, higher profits are not being driven by sales, which are expected to rise a tepid 1%, on average.
Still, any increase in average quarterly earnings would be the first year-over-year gain since late 2007.
And many investors think profits could significantly beat estimates, as they have in recent quarters.
More important, investors are betting that companies will say the economy is building enough momentum to propel sales and earnings later in the year.
“Even with growth coming from easy comparisons, we’re going to finally see growth,” said John Butters at Thomson Reuters.
Expectations of strong earnings reports helped support the stock market Friday as the Dow Jones industrial average reached a 15-month high despite a disappointing December unemployment report. Friday’s gains helped the stock market notch an overall advance for the first five days of the new year.
The Dow rose 1.8% last week, and the S&P 500 climbed 2.7%. Such showings often have been precursors to gains over the full year.
Earnings were propped up last year by rampant cost-cutting. Now, some analysts say, even a mild pickup in sales could significantly boost earnings.
On Friday, for example, shipping giant United Parcel Service Inc. raised its fourth-quarter profit projection. The company cited cost cuts as well as slowly improving domestic and international business.
The financial crisis “scared the corporate sector so badly that they all prepared for the second coming of the Great Depression,” said Jim Paulsen, chief investment strategist at Wells Capital Management. “We have all these companies that are lean and mean to survive a depression, and now we’re going to give them the sales [improvement] of a recovery, and a lot of that will fall to the bottom line.”
Earnings throughout corporate America also will be helped by comparisons to extremely weak numbers a year earlier, but in a less dramatic fashion.
Total S&P earnings are expected to be $145 billion, just shy of the $155 billion they reached in the fourth quarter of 2007, according to Thomson Reuters.
Early signs indicate that many companies will top estimates.
On average each quarter, two companies issue warnings about disappointing earnings for every one that boosts its forecast.
For the fourth quarter, only 1.4 negative warnings are coming for every positive one, a historically encouraging sign, according to Thomson Reuters.
Investors will pay close attention to whether sales themselves are improving and whether companies are resorting to cost-cutting to hit their numbers.
Domestic sales growth has been slow amid high unemployment and restrained consumer spending.
The bright spot has been overseas revenue, said A.C. Moore, chief investment strategist for Dunvegan Associates Inc. in Santa Barbara.
“You’re not seeing a lot of domestic widgets being made, but international growth is strong,” Moore said.
