As companies rolled out their third-quarter financial reports over the past two weeks, it was tempting to write off the cavalcade of earnings disappointments as the result of issues that were specific to certain firms or industries. Google Inc.'s weak numbers resulted in large part from the addition of Motorola, IBM Corp. was hit by currency fluctuations, General Electric Co. sustained sharply lower orders for wind turbines, and so on.
But revenue slowdown warnings from three other global bellwethers – fast food giant McDonald's Corp. and industrial conglomerate Honeywell International Inc. last week, and industrial equipment manufacturer Caterpillar Inc. on Monday – more decisively signal an economic pullback ahead.
Not that you would know it from the investor reaction to Caterpillar's report. The stock was up about 1 per cent in mid-afternoon trading on the New York Stock Exchange after reporting its best third-quarter sales and profits ever.
The problem? The company also trimmed its revenue forecast for this year to $66-billion (U.S.) from $68-billion to $70-billion, and its earnings forecast to $9 to $9.25 a share from $9.60, because of a slowing global economy. Dealers of Caterpillar equipment have cut orders to well below what they're selling, a sign that they are trying to run down inventories in the face of weak demand.
Given its size and worldwide reach, Caterpillar's forecast for global economic growth is particularly interesting. The news isn't good: Caterpillar now forecasts 2.5-per-cent GDP growth this year, down from its earlier forecast of 3.3 per cent. For 2013 it's forecasting 2.7-per-cent growth and no recession, but that too could change.
News from other companies reporting Monday offers no respite. Toy maker Hasbro saw weaker-than-expected sales, and clothing maker VF Corp., known for its North Face and Wrangler brands, missed analyst estimates.
Yet for all the mounting pressure on sentiment, the market seems to largely be brushing off the bad news. The Dow Jones and S&P are levitating near pre-credit crisis levels, evidently anticipating that if things get any worse, central bankers will simply pump more money into the system.
At some point, investors will start to ask whether there isn't too much of a disconnect between what CEOs of bellwether companies are telling them, and where stock prices are heading.
Sean Silcoff