Although corporate profits in the fourth quarter will likely be dramatically better than a year ago, CEOs aren't pounding their chests yet.
Most chief executives acknowledge that the fourth quarter brought higher sales but remain reluctant to provide guidance that looks much into the future, says Hank Herrmann, chief executive of Waddell & Reed Financial (WDR), an Overland Park, Kan., fund company that manages $70 billion.
"A few [companies] are building backlogs, but not a lot. A few people are talking about their book of business improving some, but not a lot," he says. "Part of it is most CEOs still doubt the strength of final demand. The first quarter will be the first time where they start to feel confident about the demand they see. The fourth quarter still has too much of a seasonal element and [they worry that] the inventory rebound could be ephemeral."
Once companies see evidence of new job creation and decide they need to have capacity in place to meet an eventual rise in consumer demand, Herrmann believes CEOs will be more willing to take a chance on offering more constructive guidance for the future. Peter Cardillo, chief market economist at Avalon Partners, senses more enthusiasm among CEOs, based on signs of stronger economic activity ahead. Cardillo expects companies to start providing slightly longer-term earnings estimates, but with guarded outlooks.
Just how strong will earnings be? The weekly outlook published by Thomson Reuters (TRI) on Jan. 8 estimated a 184% increase in profits for the companies in the Standard & Poor's 500-stock index. The highest year-over-year growth rates are expected in financials (up to $2.4 billion, from -$81 billion a year ago), materials (up 163% to $3.0 billion) and consumer discretionary (up 114% to $15.5 billion), while the lowest anticipated growth is in energy (down 24% to $18.5 billion) and industrials (down 13% to $154.8 billion).
The easy comparisons with the fourth quarter of 2008—the worst in index history—make for growth forecasts that border on being ridiculous, says Howard Silverblatt, head of index services at Standard & Poor's (MHP). "Earnings [for the S&P 500] usually tend to be in the $22 [per share] range. They fell all the way to negative 9¢ [a year ago], the only negative ever."
The difference between -9¢ and the $16.09 that S&P estimates for the latest quarter equates to a growth rate above 17,000%, says Silverblatt. For a more practical comparison, he points to S&P 500 earnings of $15.22 in the fourth quarter of 2007, and $21.99 for the last three months of 2006—before the economy began to teeter.
Jeffrey Kleintop, chief market strategist for research at LPL Financial in Boston, wrote in an e-mail message that he expects profits for the S&P 500 to come in slightly above the mean estimate of $16.05. If the financial sector were eliminated from the year-over-year comparison, he said, earnings would be up by only 8%. Kleintop is one of a handful of professionals who believe comparisons with the 2009 third-quarter—instead of the year-ago quarter—make more sense on this occasion. He expects an annualized 5% revenue growth rate during the fourth quarter, plus an 0.4% increase to margins, to boost earnings 8% above third-quarter levels.
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