Corporate profits are coming back. The only question is for how long.
Even pessimistic investors expect strong results from U.S. companies when Alcoa (AA) kicks off first-quarter earnings season on Apr. 12. "This quarter's profits are going to look quite robust," Palantir Fund (PALIX) portfolio manager Tom Samuels says, even as he predicts a downturn for profits and the economy later this year.
Analysts surveyed by Bloomberg predict first-quarter earnings for the large-cap Standard & Poor's 500-stock index will rise an average of 31.7% from a year earlier. In a sign the economy is rebounding from the Great Recession of 2008 and 2009, sales are projected to rise 10.5%.
Companies revealing results from the first three months of 2010 have a lot going for them. They slashed costs and are benefiting from a U.S. economy that grew 5.6% in the last quarter of 2009. Action Economics expects U.S. gross domestic product to rise another 2.5% in the first quarter of 2010. Most of all, corporate results will look great when compared with a year earlier, when, as Samuels says, "we were in the grip of that last panic move down in the markets."
With the recession over, it will become easier for U.S. companies to generate profits, says J.J. Schenkelberg, portfolio manager at CLS Investments in Omaha. Outside of the financial sector, she says, "we're not too far away from normal."
The recovery in profits has been rapid, with S&P 500 earnings increasing 98.5% in the last quarter of 2009. "A lot of companies are back to the profit levels that existed back in the 2007 peak," says Brad Thompson, fund manager at Frost Investment Advisors in San Antonio.
Apple (AAPL) is a leading example. When it posts results on Apr. 20, Apple is expected to report a 37% growth in earnings per share and a 31% rise in sales. Analysts expect Wal-Mart (WMT), which reports May 18, to post a 9.9% increase in earnings and a 4.4% rise in revenue. A year earlier, the world's largest retailer saw sales fall 0.7% and managed only a 1.3% increase in earnings.
According to Bloomberg, the biggest rebound will come from the materials sector, which analysts expect to boost earnings from $1.69 billion to $4.98 billion, a 195% rise. Of the 10 major sectors of the S&P 500, only telecommunications and utilities are expected to see earnings fall, by 4.2% and 1.6%, respectively.
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