If Monsanto Co. and Alcoa Inc. were representative of the U.S. economy as a whole, their solid fourth quarter earnings would be reason to start lighting celebratory cigars. But there remain ample reasons to be cautious about corporate America's fourth-quarter performance, and the outlook for 2013.
Market data firm FactSet reports that analysts on average are looking for just 2.4 per cent earnings and 2.2 per cent revenue growth for S&P index companies as a whole in the fourth quarter, followed by an anemic increase of 2.4 per cent and 0.9 per cent, respectively, in the first quarter.
As of Friday, 78 S&P500 companies had issued negative earnings guidance for the fourth quarter, almost three times as many as those that issued positive guidance. Industrials, information technology and health care sectors are expected to show earnings declines, while a predicted drop in Apple earnings – its first in over nine years, if analysts are correct – will undoubtedly send shudders through the markets.
There are many bright spots in the forecasts – seven of 10 sectors are forecast to show earnings increases this quarter, led by financials, FactSet says, and full-year 2013 forecasts call for robust year-over-year growth of 9.4 per cent for profits and 4.1 per cent for revenues among index companies.
But given larger concerns about weak GDP growth and the lingering effects of the global credit crisis and economic sluggishness – not to mention investing legend Jeremy Grantham's recent warnings that long-term growth prospects for the U.S. economy are far weaker than they have been for the past century, is the street being too optimistic? There's good reason to think so. FactSet shows that analyst forecasts have overestimated overall earnings one year out by a median of 5.5 per cent over the past 15 years. Earnings estimates for the fourth quarter steadily retreated in the last several weeks of 2012.
Meanwhile, there's a strong divergence between industry analysts and market strategists on the outlook for the S&P index: analysts forecast a 12.5 per cent gain this year, compared to just 1.8 per cent for strategists. Market murmurs that Walt Disney Co. is considering further cost-cutting efforts suggests corporate America is eyeing other ways to grow earnings than depend on higher revenues. Given the uncertain outcome of some major files in Washington, including battles to come over spending cuts and the debt ceiling – something that Alcoa CEO Klaus Kleinfeld said he's worried about – there could be downside to some of the rosier full-year predictions out there.
Sean Silcoff