So, what's really going on in America?
Company results in the US seem to give the lie to the idea that the West is in dire straits. Stephen Foley on 10 lessons from the latest reporting season
Stephen Foley is a former Associate Business Editor of The Independent, based in New York. He left in August 2012. In a decade at the paper, he covered personal finance, the UK stock market and the pharmaceuticals industry, and had also been the Business section's share tipster. Between arriving with three suitcases in Manhattan in January 2006 and his departure, he witnessed and reported on a great economic boom turning spectacularly to bust. In March 2009, he was named Business and Finance Journalist of the Year at the British Press Awards.
Friday 27 April 2012
Earnings are growing. Not soaring, but growing
There is no better snapshot of the world economy than the US earnings season. That is the concentrated period, four times a year, when the S&P 500 companies report their latest financial results and update investors on what it's really like out there.
In recent weeks, a parade of woes knocked investor confidence: the escalating eurozone crisis; signs of slowdown in China; a couple of disappointing readings on the US labour market.
But more than half of these 500 firms – globe-spanning colossuses all – have now reported on the first three months of 2012, and the picture is not nearly so gloomy. We are on course for an overall 6.3 per cent growth in earnings over the same period last year, according to data from S&P Capital IQ. That is half as much again as analysts were expecting at the start of this year, and six times better than the downgraded expectations going into earnings season.
Global industry is on a sound footing
Driving that earnings strength has been the industrials sector of the economy, where diversified manufacturers such as 3M and General Electric have been more than just resilient. The products 3M makes run the gamut from car parts to dental cements to Post-it Notes; GE is the world's largest maker of jet engines and wind turbines. Both said that though the shine may be coming off emerging market growth, a resurgence in activity in the US was more than making up for it. The industrials sector as a whole is expected to post market-leading earnings growth of 17 per cent.
Job gains will be slow to come, though
There has been a trickle of companies promising to create new jobs – GE said it would hire 300 people to produce manufacturing software, for example – which is the kind of announcement that's been absent since the credit crisis. But other firms are still squeezing the labour force – one of the reasons earnings growth is outpacing revenue gains.
Europe is still top of mind for executives
You can measure the strength of global trade by the quantity of packages whizzing around the UPS distribution system. The delivery firm yesterday blamed austerity in Europe, among other factors, for its results missing analysts' forecasts, and it is hardly alone in worrying about developments on the Continent. GE's chief executive, Jeff Immelt, said he was watching Europe "with caution", and S&P Capital IQ researcher Christine Short noted that fewer companies than ever are issuing formal, numerical guidance for the next three months, "because there is so much uncertainty out there".
Companies are good at the expectations game
With results from 263 of the S&P 500 now in, 70 per cent beat expectations – but don't forget that is because hints and nudges from executives have pushed down expectations since the start of the year. Better to under-promise and over-deliver, as the saying goes. The cycle is starting again, too; outlook statements that push down analysts' forecasts for the second quarter outnumber upgrades by two to one.
Never underestimate Apple
When it comes to the expectations game, few can beat Apple. Yet again, it blew through forecasts, making it the one stand-out story of the US earnings season. A literal stampede for iPhones in China and launch of a new iPad pushed earnings up 94 per cent, and now it makes $1m in revenue every 13 minutes. Even in an IT industry that shown particular strength this earnings season, there is nothing like Apple.
On Wall Street, things stopped getting worse
Investment banks had such a bad end to 2011 that the first quarter of this year has provided a neat bounce, but trading activity is still far down on a year ago and profitability is weak. Goldman Sachs cut back on payments into its bonus pool; Morgan Stanley, JP Morgan and others are planning for more layoffs. Results from the stock exchange group Nasdaq OMX suggested subdued trading activity is set to continue. Regulators, clamping down after the credit crisis, are being blamed.
On Main Street, the credit tap is being turned slowly back on
Down in the details of the banking sector's results, though, are some positive signs for the economy beyond Wall Street and the City of London. Residential mortgages were a source of strength for JPMorgan Chase and Wells Fargo, two big US lenders, foreshadowing the improvement in the housing market that will be vital if the US consumer is to resume her place as the world's buyer of last resort. Wells Fargo boss John Stumpf said the housing market is close to a "tipping point" at which it can take off.
Beware the weather, for sure...
One factor in the unexpectedly strong first quarter has been the unusually warm weather, which is why bears are predicting a downturn in the second. All the money that is normally spent in the spring has already been spent, they growl. There may be an element of that. "Someone flipped the switch on our buyers," said Donald Tomnitz, chief executive of DR Horton, the largest US homebuilder. Even Harley-Davidson said the spring spike in motorbike sales came early this year.
... but markets seem to be too worried
As Barry Knapp, chief market strategist at Barclays, warns: "Despite the low bar for quarterly estimates, full-year expectations remain high." Those expectations will be challenging to meet, given all the risks identified by executives and investors, and share prices in the run-up to earnings season reflected ebbing confidence. The season so far, though, suggests that investors' switch to defensive stocks – the booze and fags stocks and utility companies that fare well in gloomy economic times – may have been premature. The global recovery, that fragile flower, is still straining towards the sun.
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