By Wallace Witkowski, MarketWatch
SAN FRANCISCO (MarketWatch) -- With another earnings season
almost in the can and stocks near record highs, economic recovery
here and abroad needs to do more heavy lifting for stocks to move
forward, according to analysts.
With nine-tenths of the S&P 500 Index (SPX) having reported
earnings this season, 72% of companies have beaten the Wall Street
earnings consensus, just under the 73% four-year average, Some 54%
have beaten the revenue estimate, below the four-year average of
58%, according to John Butters, senior earnings analyst at
FactSet.
Stocks hit highs on Aug. 2-- right as the peak of earnings
season drew to a close--with the S&P 500 Index finishing that
day at its intraday high of 1,709.67. The index has slipped 1.1% in
the meantime, and the next few weeks could sour sentiment further
as more and more retailers report. Department stores and general
merchandise operators, in particular, are expected to hand in
earnings declines.
High-profile retailers reporting this week include Macy's Inc.
(M) on Wednesday, with Wal-Mart Stores Inc. (WMT), Kohl's
Corp.(KSS) , and Nordstrom Inc. (JWN) on Thursday. Also, Dow
industrials component Cisco Systems Inc. (CSCO) reports on
Wednesday.
It's getting harder to squeeze profits from revenue
Since the financial crisis, companies have become adept at
squeezing more and more profit from every dollar in precious
revenue, making for profit margins that are near record highs.
That squeezing has sustained profit margins at their current
high rates, but it's not sustainable without appreciable revenue
growth, according to Russ Koesterich, global head of investment
strategy for iShares at Blackrock.
"The next leg is going to have to be top-line growth, not just
here but globally," Koesterich said. Low interest rates, cheaper
labor costs, and lower commodities prices have allowed for those
margins in a slow growth environment, Koesterich said. But as
interest rates rise and wage growth becomes more of an issue,
revenue growth is going to be needed even more to drive
profits.
While some corporate commentary has hinted that conditions in
Europe and China are improving, a look at second-quarter data from
Thomson Reuters shows that's not a broad sentiment.
According to Thomson Reuters, S&P 500 companies that derive
more than half of their revenue from the U.S. have had
earnings-per-share growth of 7.6% and revenue growth of 3.5%. On
the other hand, companies getting less than half of their revenue
domestically, have seen earnings-per-share decline by 4.9% and
revenue fall 3.2%.
Profit beats getting slimmer
One sign that record profit growth is slowing is the amount by
which companies are topping traditionally lowered Wall Street
estimates.
Companies that beat earnings estimates are doing so by some of
the thinnest margins since 2008. The average beat this season is
2.5% above expectations, compared with the average 4.3% over the
past year and 7% average over the past four years, according to
FactSet's Butters.
And analysts are sticking to their habit of lowering
expectations. The third-quarter growth rate is estimated at 4.3%,
compared to a 6.7% estimate on June 30, according to FactSet.
Even so, earnings are still on track for another record high
this season. The blended earnings growth rate is on track for a
2.1% gain -- or a 3.1% loss if you exclude financial company
earnings -- with a blended revenue growth rate on track for a 1.8%,
above the 1.2% expectation at the end of the second quarter,
according to FactSet data.
The negative outlook for the third-quarter is also on par for
the short term but well above the five-year average. So far, 68 out
of the 85 S&P 500 companies providing a third-quarter earnings
outlook, or 80%, have given one that falls below the Wall Street
consensus, according to FactSet. At this point during the
first-quarter earnings season, negative outlooks made up 79% of
guidance with the five-year average being 62%.
Stock prices need more support from the economy
Current stock prices are going to need more robust profit growth
or economic validation to support prices, said Mark Luschini, chief
investment strategist at Janney Montgomery Scott.
That sort of economic validation has to come in the form of
stronger manufacturing and services data, leading indicators, and
new orders activity, he added. Also, investors will get a glimpse
of domestic economic conditions from retailers reporting in the
next few weeks.
"There's a concern of a bifurcated recovery," Luschini said,
where even the slow economic recovery becomes more a reflection of
affluent individuals seeing the value of their assets grow while
less affluent individuals see their wages stagnate. Luschini said
he'll be paying particular attention to the NFIB small business
index survey for August for hiring expectations and data on
borrowing activity.
Economic data on deck this week includes retail sales figures on
Tuesday with inflation data on Wednesday and Thursday. Also on
Thursday, data is released on regional manufacturing conditions in
New York and Philadelphia. A slew of housing data comes out on
Thursday and Friday, and August consumer sentiment data is released
on Friday.
Then, there's September to think about
With stock prices near record levels, investors are going to
need good economic news to prop valuations up as autumn comes to
bear on the market.
Given the market is already discounting expected tapering in the
fall, the Federal Reserve's Federal Open Market Committee meeting
in September may become a non-event, Blackrock's Koesterich
said.
That doesn't mean that other headwinds aren't around. As
Koesterich points out, September has historically been the worst
month for markets globally. Plus, German elections could introduce
uncertainty into coalition efforts to repair Europe's economy, and
the U.S. budget and debt-ceiling debates will likely shake things
up before the end of the fiscal year on Sept. 30.
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