16 Jul 2004 Will Earnings Drag Or Push?
We are in the midst of earnings season once again. This time, however, analysts’ projections may be catching up to the actual pace of company earnings being reported. In more cases than in previous quarters, analysts have been a little too optimistic about the actual pace of growth. But we should not lose sight of the fact that the actual rate of earnings growth is still quite good.
As of Wednesday, July 14th, 271 of 1,632 companies in the Dow Jones Total Market Index had reported earnings. On average, they are up 60% over the same quarter last year. Those industries with the largest quarterly gains include commodity chemicals, semiconductors, heavy construction, medical supplies and Internet services. Only three industries show declines in earnings so far this reporting cycle. They include food retailers and wholesalers, non-durable household products, and containers and packaging.
Economics reports released this week largely confirm our observation of previous weeks that growth of theU.S.economy is slowing and that the Fed is correct in its assessment that gradual interest rate increases will be sufficient to contain the threat of inflation. The Fed said industrial production decreased by .3% in June after rising by .9% in May and .8% in April. Manufacturing output fell by 0.1%, while output at utilities, responding to more temperate weather, slipped 2.3%.
The production of consumer goods fell by .7%, and nearly all major categories of durable goods and non-durables — from appliances and furniture to clothing and paper products, posted decreases. An exception was production of business equipment, which rose for the fourth consecutive month, reflecting in part a 1.5% increase in the production of computers and similar electronic products, as well as increases for machinery, engines and power-transmission equipment. Today, Dell raised its second-quarter profit outlook, citing “robust” enterprise systems and services sales and market-share gains outside theU.S. IBM’s earnings rose 17% for the quarter, beating expectations. They also defied the trend among other tech companies and issued a confident business outlook for the quarter ahead.
The Wall Street Journal points out that perhaps the most significant reports this week were in the area of capacity utilization (how much industry matches what the government considers sustainable maximum output) slipped to 77.2% from 77.6% in May. This compares with an average of 81.1% for the years 1972-2001. Slack exploitation of the nation’s factories and work force was a key concern of Fed officials for most of the year and a major component in their defense for patience in raising rates.
The stock market is generally more volatile during earnings season and this one is no exception. The S&P 500 is down 2.5% and the NASDAQ index is down 6.3%. However companies’ negative earnings ‘confessions’ tend to come early in the season while there is a void of actual results which may meet or beat expectations. During the period of uncertainty stocks prices generally fall. Today the news is better from tech bellwethers IBM and Dell and stock prices are responding accordingly.
The last number released this week was the University of Michigan’s Confidence index. It increased slightly from 95.6 in June to 96 in July. Confidence is improving with the news of 1.5 million new jobs and falling gas prices. While consumers may be slowing in their spending there appears to be little reason to expect them to stop. People don’t need boats or iPods, yet sales are surging this summer.
We are more than half way through the slow summer months and early in the earnings cycle. We expect the news to be mostly positive both on the economic (world and domestic) and on the corporate fronts as we go forward. The market will likely continue to trend mostly sideways in the coming couple of months with little discernable leadership. We believe the best opportunities will likely be offshore as certain economies around the world are beginning to demonstrate increasing signs of strength.