NEW YORK (Reuters) – Wall Street may have written off corporate America too quickly.
In the early stages of the first-quarter reporting season, companies have beaten earnings forecasts at a rate of 81 percent and revenue at a rate of 76 percent, and expectations for overall corporate profit growth have almost doubled in a few short weeks, based on Thomson Reuters data for results through last week.
Earnings reports so far show that economic weakness in the euro zone and a slowdown in parts of the Chinese economy have not hurt sales and margins as feared. The earnings beats also suggest that companies have kept costs, including hiring, under control, which may not be such an optimistic signal for the labor market and economy.
Profit expectations were low going into the reporting period, partly because of concerns about overseas demand for American products and increasing costs such as higher oil prices. Companies may have also been too conservative in their own forecasts.
Less than two weeks into the reporting period, earnings for companies in the Standard Poor’s 500 are expected to have increased 6.2 percent for the first quarter, up from an estimate of 3.2 percent just before earnings began, and only just above a 2-percent forecast in February, according to Thomson Reuters data.
The low profit expectations have made it easier for companies to beat estimates than in recent quarters. In the fourth quarter, when earnings growth expectations were higher, only 62 percent of companies beat analysts’ average earnings estimates.
“There was a low bar for companies to have to pass” for first-quarter results, said Michael Sheldon, chief market strategist at RDM Financial, an investment advisory firm in Westport, Connecticut.
First-quarter revenue growth is seen at 4.9 percent, up from an April forecast of 4 percent. Much of the improvement comes from positive surprises in the financial sector , which had the weakest returns of any SP 500 sector in 2011.
The earnings period still has weeks to go and a lot can change, with results in from only about 25 percent of the SP 500, but the omens are good.
Apple Inc , with the largest market capitalization, has yet to report results. Expected growth for the SP without Apple falls to 4.8 percent, and if Apple – which releases its results on Tuesday – easily beats expectations again, the overall earnings growth number will rise.
Its earnings per share jumped 116 percent in the fourth quarter. Apple‘s per-share earnings are expected to rise more than 50 percent for the first quarter, and Thomson Reuters StarMine data shows a high probability the company will beat that. StarMine weights forecasts based on analyst accuracy and other factors.
In one sense, the first-quarter upbeat results are somewhat misleading. Financial sector companies are beating expectations, for example, despite falling profits.
Four of the five biggest surprises so far this season are banks, according to Thomson Reuters data: Bank of America Corp , Morgan Stanley , JPMorgan Chase Co and Citigroup Inc.
“A lot of (financial) companies are beating expectations because the bars have been set low to begin with … their earnings may beat expectations, but if you look closely, you see that their revenue is pretty weak,” said James Dailey, portfolio manager at the Team Asset Strategy Fund in Harrisburg, Pennsylvania.
A handful of high-profile revenue misses and warnings in the technology sector suggests plenty of fragility remains for earnings growth.
International Business Machines Corp reported revenue slightly short of Wall Street expectations, while mobile phone chip maker Qualcomm Inc warned that supply constraints could limit revenue.
Shares of the companies were hit hard this week. Other tech names disappointed, including Micron Technology Inc , which was among those with the biggest earnings misses so far this period.
Investors are also worried that slowed overseas growth will hurt companies. Stocks sold off late Friday, in part on worries about Chinese economic figures due this week.
“As we move through 2012, we anticipate that our business in China may not be immune to this cooling economy,” said Coca-Cola Co’s Chairman and Chief Executive Muhtar Kent during the company’s earnings conference call.
While the first-quarter results overall have been solid, recent data has suggested the recovery may be sputtering, particularly in job growth. If that starts to hurt consumer spending, then earnings expectations for the rest of the year could come down.
Certainly, corporations are far from focused on adding jobs. “Companies have kind of held back (on spending) because of some exogenous things,” said Scott Billeaudeau, portfolio manager at Fifth Third Asset Management in Minneapolis. “This isn’t lightning on fire – it’s still slow growth,” he said.
(Additional reporting by Angela Moon; Editing by Martin Howell)