Based on early returns for the most recent quarter, the U.S. corporate profit picture is looking brighter than at any time since the economy fell into a steep tailspin in 2007. But revenues remain relatively flat, and weak results for key struggling banks and other companies that depend on credit-scarred consumers underscore concerns that a broad recovery for the economy will be both long and painfully slow.
Such U.S. market heavyweights as IBM, eBay, Starbucks, Wells Fargo and Morgan Stanley yesterday joined the positive-earnings parade and indicated improving prospects for 2010.
But analysts warned that it was too early to discern any definitive trend from a mixed bag of results so far. And the results failed to meet the lofty expectations of equity investors, who sent the Dow Jones index to a triple-digit loss. The markets had priced in much stronger corporate gains during the remarkable rally that began last March, and are now registering their disappointment.
"It shows you that there's a lot of good news priced into many segments of the equity market," said David Rosenberg, chief economist and strategist with Gluskin Sheff + Associates Inc. in Toronto.
A year ago, Alcoa reported a quarterly loss, but it was considered a "green shoot," because it was a narrower loss than in the previous quarter, and the stock rallied. This time around, the aluminum giant reported a minuscule profit, and it took a beating.
"A less negative performance from any company doesn't cut the mustard any more," Mr. Rosenberg said.
"There's no question that earnings have bottomed. It's a matter of whether we're going to get the $75 to $80 (U.S.) that's priced in [to the benchmark S&P 500 per-share earnings estimate]or something closer to $60 to $65, which would be more consistent with a 4-per-cent nominal GDP growth world."
The bottom-line performance is not what is moving the market this time around, he said. Rather, investors are focused on revenue growth, which has "been very spotty," he said.
Meanwhile, the U.S. economy continues to sputter, reflected in the 10 per cent unemployment rate and rising bank losses on mortgages and other consumer loans. It will be improved by the end of the year, but won't occur as quickly as some investors are hoping, analysts say.
"I don't think this is a story that's going to turn around quickly," said Douglas Porter, deputy chief economist with BMO Nesbitt Burns. "We can see some very mild growth in the U.S. The housing sector has stopped subtracting from growth and the consumer is slowly but surely grinding out a recovery."
As a result, it could be a long year for the major U.S. banks, too.
"The canary in the coal mine is clearly the financials," Mr. Rosenberg said.
"There may be good cause for concern that consumer behaviour may take years to return to the same patterns observed before the Great Recession hit, as households save more, pay down debt and spend relatively less," William O'Donnell, a Treasury-market analyst with RBS Securities Inc., said in a note to clients.
Bank of America Corp. is the latest big U.S. bank to report continuing high loan losses and a hit to the bottom line stemming from the repayment of government bailout money. But like rival Citigroup, its core commercial business appears to be slowly stabilizing and its provision for bad debts is shrinking.
In the fourth quarter, the bank set aside $10.1-billion to cover future losses, 14 per cent less than in the previous quarter. Bank of America posted a loss of $5.2-billion, or 60 cents a share, compared with $2.4-billion, or 48 cents a year earlier.
"There's no question that bank earnings were going to be a challenge," said Brian Bethune, chief U.S. financial economist with IHS Global Insight.
The banks have to make up for weak balance sheets through higher operating margins or further cost cuts.
"That's a process that isn't going to dissipate until probably the middle of 2010," Mr. Bethune said.
"Obviously, the litmus test becomes harder," he said. "They've delivered better results, they've raised their outlooks. So now, the question is can they exceed those."