The Short View: Corporate profits remain robust
The Short View: Corporate profits remain robust
By Philip Coggan, Investment Editor
Published: May 3 2006 17:27 | Last updated: May 3 2006 17:27. Copyright by The Financial Times
While investors fret about high oil prices and the continued tension between the US and Iran, the corporate sector continues to deliver a strong profits performance. Dresdner Kleinwort Wasserstein says that, in April, analysts were continuing to upgrade profit forecasts at the global level.
It seems that, so far, high raw materials prices have not dented corporate profits thanks to the sector’s success in containing wage pressures. Robust global economic growth is thus feeding straight through to the bottom line.
In the US, David Kostin of Goldman Sachs says that 68 per cent of the S&P 500 index has reported results and the first quarter positive surprises are the best in several years. “Industrial and materials companies led the way in actual results and revisions to 2006 and 2007 earnings per share estimates,” Mr Kostin says. “This growth stands in contrast to traditionally defensive sectors, such as healthcare and consumer staples.”
Many analysts believe the strength of corporate profits will underpin equity markets for the rest of the year. Even Andrew Smithers, a renowned bear, says that the high cash yield on the US stock market suggests the short-term outlook for equities is good.
“We are very relaxed about the earnings story in 2006,” says Ajay Kapur, the Citigroup strategist. “Top-line growth looks healthy and costs continue to be contained. Consensus earnings growth forecasts for 2006 of 12.1 per cent don’t look outrageous to us.” Mr Kapur adds: “History suggests US and European markets need negative earnings surprises in excess of 14 per cent and 12 per cent, respectively, for the markets to falter. Earnings would need to contract for the markets to wobble due to profits.”
But there are one or two warning signs. Bear Stearns points out that profit margins declined in the first quarter, just as they did in the fourth quarter of 2005. “The deterioration in pre-tax margin growth during the past two quarters is something that we haven’t seen in more than five years,” says the broker. If that trend continues, then the outlook for 2007 may not be as rosy as investors believe.
By Philip Coggan, Investment Editor
Published: May 3 2006 17:27 | Last updated: May 3 2006 17:27. Copyright by The Financial Times
While investors fret about high oil prices and the continued tension between the US and Iran, the corporate sector continues to deliver a strong profits performance. Dresdner Kleinwort Wasserstein says that, in April, analysts were continuing to upgrade profit forecasts at the global level.
It seems that, so far, high raw materials prices have not dented corporate profits thanks to the sector’s success in containing wage pressures. Robust global economic growth is thus feeding straight through to the bottom line.
In the US, David Kostin of Goldman Sachs says that 68 per cent of the S&P 500 index has reported results and the first quarter positive surprises are the best in several years. “Industrial and materials companies led the way in actual results and revisions to 2006 and 2007 earnings per share estimates,” Mr Kostin says. “This growth stands in contrast to traditionally defensive sectors, such as healthcare and consumer staples.”
Many analysts believe the strength of corporate profits will underpin equity markets for the rest of the year. Even Andrew Smithers, a renowned bear, says that the high cash yield on the US stock market suggests the short-term outlook for equities is good.
“We are very relaxed about the earnings story in 2006,” says Ajay Kapur, the Citigroup strategist. “Top-line growth looks healthy and costs continue to be contained. Consensus earnings growth forecasts for 2006 of 12.1 per cent don’t look outrageous to us.” Mr Kapur adds: “History suggests US and European markets need negative earnings surprises in excess of 14 per cent and 12 per cent, respectively, for the markets to falter. Earnings would need to contract for the markets to wobble due to profits.”
But there are one or two warning signs. Bear Stearns points out that profit margins declined in the first quarter, just as they did in the fourth quarter of 2005. “The deterioration in pre-tax margin growth during the past two quarters is something that we haven’t seen in more than five years,” says the broker. If that trend continues, then the outlook for 2007 may not be as rosy as investors believe.
posted by Carlos T Mock at 10:03 AM
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