The domestic quarterly profit reporting season is not yet in full swing, but the Americans are almost two-thirds complete. So far, the telecommunications, health care and basic materials sectors have been the standouts, while consumer goods stocks have disappointed. Over all, U.S. fourth-quarter earnings growth is coming at 6 per cent relative to 2013 and profits are a scant 0.2 per cent higher.
So far, four of the S&P 500's seven telecommunications stocks have reported. Led by Level 3 Communications Inc.'s 52-per-cent earnings surge, year-over-year profit growth for the sector is 24 per cent. Despite the strong growth, however, results have missed analyst estimates by 0.5 per cent.
Eighty per cent of U.S. health-care stocks have reported an average 14-per-cent increase in earnings. The pace is marginally above analyst estimates. Biotechnology stocks are the clear leaders, generating a remarkable 99-per-cent year-over-year increase in profits. Gilead Sciences Inc. posted an astounding 340-per-cent gain in earnings on the back of strong sales of hepatitis treatments Harvoni and Sovaldi.
The continuing slide in commodity prices makes the success of U.S. basic materials stocks a bit of a surprise. The sector as a whole posted a 10.7-per-cent bump in profits. The commodity chemicals subsector provided the bulk of the support, reporting profits 10 per cent above estimates. Dow Chemical Co.'s results were particularly solid at 22.3 per cent higher than analysts' forecasts.
The U.S. consumer goods sector is also surprising – although in this case, to the down side. There were high hopes for U.S. consumer-spending growth in the fourth quarter, but corporate results in goods sectors have stunk.
Thanks to Nike Inc., the personal goods subsector eked out a 1.6-per-cent annual gain in earnings. Household products, leisure goods and tobacco, on the other hand, saw profits fall by 6.2 per cent, 16.3 per cent and 12.9 per cent, respectively.
There are about 160 more S&P 500 companies yet to report. Investors can hope results improve because taken as a whole, growth so far has been uninspiring. The continued sluggishness in consumer sector earnings is notably unsettling – much of the optimism surrounding U.S. economic growth involves rising wages and spending, and more buying of foreign goods with the stronger U.S. dollar.
More positively, strong results from Level 3 Communications could indicate that Internet providers have started the long-awaited spending spree to upgrade broadband capacity. This would be a highly investable trend benefiting a number of companies including Cisco Systems Inc., Juniper Networks Inc. (disclosure: I own this stock) and many others.
The chemical sector seems to be another area where further study would pay off. Chemical manufacturers such as Dow should continue to benefit from lower energy costs because oil and natural gas are primary inputs for their products.
