The years of double-digit earnings growth may be coming to an end.
Fourth-quarter operating profits at Standard & Poor's 500 companies are expected to rise 9.4% from a year ago, to $199 billion.
That's still a healthy growth rate but slower than the double-digit rise of the past 4 1/2 years. Operating profit excludes one-time gains or losses and so gives a clearer picture of a company's actual performance.
Fueling the earnings rise is strength among financial and energy companies, which is offset by sluggishness in consumer-driven businesses like retailers.
“The long-expected earnings slowdown appears to finally be materializing,” said Howard Silverblattt, senior index analyst at S&P. “It appears that an earnings deceleration in the consumer discretionary sector and the general economic pullback will contribute the most to the single-digit environment.”
The Buyback Effect
On top of that, earnings actually appear rosier than they are because of stock buybacks, which boost per-share profits simply because there are fewer shares. One in five companies has increased earnings per share at least 4% year-to-date through buybacks, according to S&P.
“We’ve never seen anything like this--whether it’s the number of companies, the aggregate dollars, or the share-count reduction and the impact on earnings per share,” Silverblatt said. “We are in new, uncharted territory.”
Alcoa, the first Dow component expected to report, will kick off the earnings season later today after the stock market closes. The bulk of companies won’t begin reporting until next week and most will post results by the end of the month.
Within the S&P 500, there have been 86 earnings warnings-–companies saying earnings will be worse-than-expected-–compared with 35 positive pre-announcements. That’s slightly more negative than normal. However, when you consider a broader universe of companies, it looks like an average quarter, said John Butters, senior research analyst at Thomson Financial.
The energy sector will continue to be among the strongest performers. Although quarterly profits in the group are expected to be down 2.7%, that's only because the year-ago quarter was so strong. Energy stocks make up about 9.8% of the S&P 500's market value but generate 15% of the earnings.
"Look Beyond Quarter"
“You have to look beyond the quarter,” Silverblatt said. “Energy is (lower), but it’s a nice number. Materials and telecom are both high, but they had such bad comparisons so it’s not just all increased profit. It’s partially due to the comparisons.”
Fourth-quarter earnings for the materials sector, which include metals and mining companies, are expected to climb 37% from last year. Telecommunications is projected to soar 64%, partly because of a weak year-ago quarter.
Financial companies--which comprise 22.3% of the S&P’s market value and generate 27% of its profits-–are also expected to deliver some of the strongest results, up about 24% from last year.
The brokerage houses are expected to continue to generate strong earnings from trading and merger and acquisitions, while the insurers are also expected to do very well. Given a weak quarter last year due to the high number of hurricanes, insurers suffered very few disasters this quarter and were able to increase premiums, Silverblatt said.
Consumer Slowdown
The consumer discretionary sector-–which includes everything from retailers to entertainment companies and automakers-–had a good year overall. Still, quarterly earnings are expected to drop 3.0% from year-ago levels.
"As the economy slows, (consumers) pull back on spending, Silverblatt said. “That will translate into lower sales and lower profits, and the Christmas season for a lot of these companies was not good.”
For the year ahead, operating earnings for S&P 500 companies are expected to climb about 9.5%, led by information technology and telecommunications. Robust economic conditions in Europe and Asia are expected to drive tech and telecom, which derive more than half of revenues overseas, according to S&P.
While profits may slow from their feverish pace, the S&P Investment Policy Committee expects its namesake index will continue to climb this year, rising about 6% from current levels and reaching 1510 by year-end.