NEW YORK - The profits picture painted so far by US companies has given little indication of a pickup in earnings growth, supporting the argument that the stock market had come too far, too fast.
Of particular concern is the still-sluggish growth in sales. Revenue growth is projected at just 0.6 per cent for the fourth quarter, although the overall number of companies exceeding sales forecasts is better than the third quarter and the long-term average.
Still, more beats on revenue have not been enough to boost a stock market that was viewed as in danger of a correction heading into 2014. In the last two days, rising concerns about global growth and less Federal Reserve Bank support have encourage heavy selling.
With results in from roughly a quarter of the Standard & Poor’s 500 companies, 70 per cent are beating analysts’ revenue estimates, above the long-term average of 61 per cent for a full reporting period, according to Thomson Reuters data.
Some of the sales misses have come from such high-profile names as International Business Machines Corp, while companies still are resorting to cost cutting to boost the bottom line, underscoring a weakness in sales that has long darkened the profit picture.
After last year’s nearly 30-per cent gain in the stock market, results have done little to support prices, which by valuation metrics such as price-to-earnings ratios are currently seen as a bit on the expensive side. The S&P 500 closed out the week down 2 per cent, its worst week since June 2012. “This is a transition period as the Fed throttles back,” said Quincy Krosby, market strategist for Prudential Financial, which is based in Newark, New Jersey.
Early results are showing more of the same that investors are used to with earnings, including cost cutting.
“You’ve heard that from a number of companies in different sectors,” she added.
Texas Instruments Inc, for instance, posted sales that beat analysts’ expectations, but the US chipmaker also said it would cut about 3 per cent of its global workforce. Sales at IBM, the world’s biggest technology services company, fell 6 per cent in emerging markets, including a 23 per cent tumble in China, and the company only managed to beat earnings estimates thanks to a reduced share count and lower tax rate. “There’s revenue growth. It’s just not as robust as we would like,” said Nick Raich, chief executive of The Earnings Scout, an independent research firm in Cleveland, Ohio.
There have been exceptions. Netflix Inc, the S&P’s best performer in 2013, beat estimates for subscriber growth, resulting in a big jump in its shares earlier this week.
Coming into the year, strategists looked to a more robust US economy to boost profits and corporate spending. Analysts at Goldman Sachs note that, typically, market rallies allow for price-earnings multiples to rise until the S&P’s forward P/E reaches about 15. Stocks can keep rising thereafter, but sales growth has to come into play, they added.
So far, sales growth has been disappointing, and the current forward P/E of about 15.3 is seen as getting expensive.
“The market’s going to demand top line (growth) at some point. I would have thought that that time would have already come, and it hasn’t,” said Uri Landesman, president at Platinum Partners in New York.
Some sectors have been better than others. The early run of reports from banks were generally positive, with analysts at Bank of America-Merrill Lynch noting lower expenses and credit costs, offsetting weak trends in lending and fixed income trading.
SPENDING NOT IN THE OFFING
Goldman expects capital expenditures to rise 9 per cent in 2014, compared with a meager 2 per cent rise in 2013, based on increased capacity utilization, low funding costs and rising consumer confidence.
While some companies have announced plans for more spending, including Procter & Gamble Co and United Technologies Corp, it is not enough to suggest the tide is turning on the spending.
Investors have been trying to gauge how quickly the Fed will wind down its bond-buying stimulus that has helped keep a lid on interest rates and made borrowing favorable.
“It’s not like there’s no spending,” Raich said. “The key question is if rates go up, will there be further retrenchment from the CEOs. It’s all about that confidence from them.”
Corporate balance sheets currently hold about $1.3 trillion in cash, excluding financial companies, according to Goldman Sachs.
Overall, sixty-four per cent of companies have beaten profit expectations, close to the 63 per cent long-term average for a full reporting period. Fourth quarter earnings growth now is expected to have risen 7.5 per cent, compared with last week’s forecast of 7.1 per cent, Thomson Reuters data showed.
But estimates for 2014 still appear too optimistic - full-year earnings growth currently is forecast at 10.4 per cent, a figure likely to come down.
“If estimates for 2014 as a whole don’t start to come down, we don’t think they can necessarily be beaten,” said Michael Mullaney, chief investment officer at Fiduciary Trust Co in Boston, which oversees more than $11.2 billion.