October 28, 2012
Earnings stung investors last week, showing that in a global economy U.S. investors will get hurt when a good chunk of the world is in pain.
And there definitely is pain. As much of Europe sinks deeper into a recession, Spain reported a 25.02 percent unemployment rate Friday — a rise from 24.6 percent. Throughout last week, one major U.S. company after another reported sales slumping because Europeans are cutting back on purchases.
With car sales plunging on the continent, Ford announced three plant closings and a loss of $1.5 billion connected with restructuring European operations. Wary U.S. executives spoke cautiously about the near future, and talk of layoffs came from companies as varied as Kimberly-Clark, Zynga, Dow Chemical, Corning and Lockheed Martin.
"Data this week reinforced the growing impression that businesses have hit the brakes hard on capital spending since midyear," said Citigroup economist Robert DiClemente. "The sharp and abrupt falloff in core capital goods orders since June has already made its way into business investment."
Scott Davis, chief executive of United Parcel Service, said, "In Europe, more countries are slipping into recession as they impose austerity measures." He noted that economic growth was best in Asia despite recent slowing there.
Still, Asia too is feeling the pinch as companies have trouble selling to Europe and weakness in one country gnaws at another. Emerging market stocks on Friday dipped to the lowest level in six weeks, and copper was down for the sixth day in a row.
"You don't need to be a genius to see what this is telling you about the global macro backdrop," said David Rosenberg, economist with Gluskin Sheff.
Yet the U.S. economy grew slightly better than expected in the third quarter. Analysts had been predicting growth under a 2 percent annual rate, but the gross domestic product figure reported Friday was at 2 percent — still weak, but not as weak as thought. Consumer confidence helped. As U.S. corporate executives have become increasingly guarded about the future, consumer confidence just hit a five-year high.
With companies in the midst of reporting profits for the third quarter, analysts now expect a decline of 1.2 percent from the same period last year. Only 37 percent of companies have reported sales above analysts' expectation, according to analyst Greg Harrison of Thomson Reuters.
This is far beneath the long-term average of 62 percent and lower than the average over the past four quarters of 55 percent, Harrison said.
Even beloved companies such as Apple and Amazon have disappointed investors lately.
Slightly more than half of the Standard & Poor's 500 companies have reported earnings for the third quarter, and 114 are scheduled for next week.
"Investors will be watching to see if this trend of revenue disappointments continues," Harrison said. Even though 63 percent of companies have delivered earnings in line with expectations, many are simultaneously missing on revenue. In other words, they are meeting profit expectations by cutting costs, rather than increasing sales.
Consumer discretionary stocks have had the highest earnings growth rate, or 8 percent. Casinos and gambling and cable and satellite have been especially strong, with growth of more than 37 percent for the third quarter.
Financials have been the second strongest, with growth of 6.3 percent. The materials sector's growth rate has declined 26.4 percent as demand in China has fallen sharply. The rate for aluminum is down 80 percent.
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