So, what's really going on in America?

Company results in the US seem to give the lie to the idea that the West is in dire straits. Stephen Foley on 10 lessons from the latest reporting season

Earnings are growing. Not soaring, but growing

There is no better snapshot of the world economy than the US earnings season. That is the concentrated period, four times a year, when the S&P 500 companies report their latest financial results and update investors on what it's really like out there.

In recent weeks, a parade of woes knocked investor confidence: the escalating eurozone crisis; signs of slowdown in China; a couple of disappointing readings on the US labour market.

But more than half of these 500 firms – globe-spanning colossuses all – have now reported on the first three months of 2012, and the picture is not nearly so gloomy. We are on course for an overall 6.3 per cent growth in earnings over the same period last year, according to data from S&P Capital IQ. That is half as much again as analysts were expecting at the start of this year, and six times better than the downgraded expectations going into earnings season.

Global industry is on a sound footing

Driving that earnings strength has been the industrials sector of the economy, where diversified manufacturers such as 3M and General Electric have been more than just resilient. The products 3M makes run the gamut from car parts to dental cements to Post-it Notes; GE is the world's largest maker of jet engines and wind turbines. Both said that though the shine may be coming off emerging market growth, a resurgence in activity in the US was more than making up for it. The industrials sector as a whole is expected to post market-leading earnings growth of 17 per cent.

Job gains will be slow to come, though

There has been a trickle of companies promising to create new jobs – GE said it would hire 300 people to produce manufacturing software, for example – which is the kind of announcement that's been absent since the credit crisis. But other firms are still squeezing the labour force – one of the reasons earnings growth is outpacing revenue gains.

Europe is still top of mind for executives

You can measure the strength of global trade by the quantity of packages whizzing around the UPS distribution system. The delivery firm yesterday blamed austerity in Europe, among other factors, for its results missing analysts' forecasts, and it is hardly alone in worrying about developments on the Continent. GE's chief executive, Jeff Immelt, said he was watching Europe "with caution", and S&P Capital IQ researcher Christine Short noted that fewer companies than ever are issuing formal, numerical guidance for the next three months, "because there is so much uncertainty out there".

Companies are good at the expectations game

With results from 263 of the S&P 500 now in, 70 per cent beat expectations – but don't forget that is because hints and nudges from executives have pushed down expectations since the start of the year. Better to under-promise and over-deliver, as the saying goes. The cycle is starting again, too; outlook statements that push down analysts' forecasts for the second quarter outnumber upgrades by two to one.

Never underestimate Apple

When it comes to the expectations game, few can beat Apple. Yet again, it blew through forecasts, making it the one stand-out story of the US earnings season. A literal stampede for iPhones in China and launch of a new iPad pushed earnings up 94 per cent, and now it makes $1m in revenue every 13 minutes. Even in an IT industry that shown particular strength this earnings season, there is nothing like Apple.

On Wall Street, things stopped getting worse

Investment banks had such a bad end to 2011 that the first quarter of this year has provided a neat bounce, but trading activity is still far down on a year ago and profitability is weak. Goldman Sachs cut back on payments into its bonus pool; Morgan Stanley, JP Morgan and others are planning for more layoffs. Results from the stock exchange group Nasdaq OMX suggested subdued trading activity is set to continue. Regulators, clamping down after the credit crisis, are being blamed.

On Main Street, the credit tap is being turned slowly back on

Down in the details of the banking sector's results, though, are some positive signs for the economy beyond Wall Street and the City of London. Residential mortgages were a source of strength for JPMorgan Chase and Wells Fargo, two big US lenders, foreshadowing the improvement in the housing market that will be vital if the US consumer is to resume her place as the world's buyer of last resort. Wells Fargo boss John Stumpf said the housing market is close to a "tipping point" at which it can take off.

Beware the weather, for sure...

One factor in the unexpectedly strong first quarter has been the unusually warm weather, which is why bears are predicting a downturn in the second. All the money that is normally spent in the spring has already been spent, they growl. There may be an element of that. "Someone flipped the switch on our buyers," said Donald Tomnitz, chief executive of DR Horton, the largest US homebuilder. Even Harley-Davidson said the spring spike in motorbike sales came early this year.

... but markets seem to be too worried

As Barry Knapp, chief market strategist at Barclays, warns: "Despite the low bar for quarterly estimates, full-year expectations remain high." Those expectations will be challenging to meet, given all the risks identified by executives and investors, and share prices in the run-up to earnings season reflected ebbing confidence. The season so far, though, suggests that investors' switch to defensive stocks – the booze and fags stocks and utility companies that fare well in gloomy economic times – may have been premature. The global recovery, that fragile flower, is still straining towards the sun.

Independent Comment
blog comments powered by Disqus
Career Services

Day In a Page

The 50 Best beachwear

The 50 Best beachwear

The hottest summer gear for men and women
Still standing: George Galloway reveals why his staunchly Leftist outlook is still invariably right

Still standing: George Galloway

Written off, ridiculed, wrongly accused of taking bribes the honourable member for Bradford West, has never bowed to the critics.
How will Daniel Radcliffe's fans react to his latest turn - as a damaged, drug-taking Beatnik poet?

Daniel Radcliffe as drug-taking Beatnik poet

His decade as the boy wizard may be over, but that hasn't hexed Daniel Radcliffe's enchanted life.
For whom the bell tolls: £20m 'Memo' project takes shape on Dorset's Jurassic coast

'Memo' project takes shape on Dorset coast

It started as a stonemason's visionary idea – to commemorate all the species that have ever existed and are now extinct.
Just add sunshine: Bill Granger's Turkish delights

Just add sunshine: Bill Granger's Turkish delights

Turkish cuisine is perfect for those long, sociable weekend meals with friends. It's just a shame that money can't buy the key ingredient.
Objets czar: David Usborne’s collection of myriad objects is quite the mystery

Objets czar: David Usborne’s collection of myriad objects

To others, they're junk. To David Usborne, they are his life: useful gizmos, mysterious thingamajigs and anonymous articles that dominate his home.
The iron ore lady: Why the world's richest woman is mired in controversy

World's richest woman: Gina Rinehart

Family feuds, attempts to control the Australian media and bitter public disputes are keeping the mining magnate in the headlines.
We just click: How Lego keeps building on its success

How Lego keeps building on its success

This year, Lego announced record profits. Gerard Gilbert visits its Denmark HQ.
The other bits: Mark Hix creates delicious and economical meals with cheaper cuts of meat

Mark Hix cooks with cheaper cuts of meat

Our chef creates delicious and economical meals on a budget
Strokes of genius: How to create summer's bold make-up look

Strokes of genius: Summer's bold make-up

From coral lips to fly-away fringes, make-up artist Kim Brown and hair stylist Richard Scorer reveal how to create the look
Marking his territory: Kilian Hennessy creates fragrances designed to provoke the senses

Marking his territory: Kilian Hennessy

The perfumer creates fragrances designed to provoke the senses
Photo essay: Britain's 1948 Olympians today

Britain's 1948 Olympians today

Photo essay
The top five E3 2012 triumphs: From Ubisoft's suite of titles to Dishonored and The Last of Us

The top five E3 2012 triumphs

The games and moments that left us grinning like the Cheshire Cat
The green movement at 50: Can the world be saved?

Can the world be saved?

Population growth and climate change are the big problems facing the earth in the next 50 years. But are there any solutions?
France: Will xenophobia go mainstream?

France: Will xenophobia go mainstream?

In the beautiful Rhone delta, John Lichfield visits a village where a dangerous new political landscape is taking shape