Corporate profits are coming in much better than expected and growing faster than they have in a year, a huge relief to investors who were prepared for a letdown.
More than half the companies in the Standard & Poor’s 500 index have reported fourth quarter results, 277, and the results are well ahead of plan at 7.4% growth. It’s a welcome boost in profit despite all the warnings before the earning season started and concerns of weakness in the U.S. and emerging nations.
“The earnings season was actually pretty good,” says Joe Kinahan of TD Ameritrade. “When stocks are at an all-time high, people are looking for a reason to sell. But they didn’t sell on earnings.”
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The fourth-quarter reporting season was a pivotal one for the markets as investors have been looking for a tangible sign that fundamentals justify stock prices at their current levels. Investors have been carefully examining companies’ reports to focus on the fact:
• Companies are again beating expectations. During the quarter, 74% of the companies that have reported topped expectations, says John Butters of FactSet Research, the highest level of outperformance since the fourth quarter of 2011. Such a rampant number of better-than-expected profit means growth is coming in well above the 5.7% that was expected on Jan. 1.
• Foreign cross currents. Concern over the strength of markets outside the U.S. was a big wild card for the quarter. The strong dollar did hurt the profit of several companies including DuPont, Procter & Gamble, Johnson & Johnson and Microsoft, Butters says. But fears of a slowdown in emerging markets are overblown, at least according to companies like Caterpillar, Starbucks and Apple.
• Tendency to lower expectations. CEOs are again being cautious about the future, causing analysts to cut their profit forecasts for the current quarter — the fifth straight time this has happened, says Sheraz Mian of Zacks Investment Research. Anemic revenue growth and reliance on cost cutting bodes ill for the future, Mian says. Revenue is only coming in at 2.7%, down from 4.7% growth in the fourth quarter of 2012, says S&P Capital IQ. Analysts are looking for 1.8% earnings growth in the current quarter, down from 4.3% expected before earnings season, Butters says.
While earnings have been good, investors demand more when stocks aren’t cheap anymore, Kinahan says. “When we are at all-time highs in the market, you don’t just have to beat, you must crush,” he says.
Courtesy of USA Today