Feb. 10--Earnings reporting season is approaching the home stretch, with assurances for investors that U.S. companies are still able to deliver acceptable profits despite a multitude of worries about global markets.
Investors were on edge earlier in the season as they feared U.S. companies would display the crippling effects of weak global economies and a strong dollar. The assumption was that a near recession in Europe and weakness in Asia would mean reluctant customers for U.S. companies selling abroad. And with the U.S. dollar strong compared with foreign currencies, the concern was that U.S. products would be expensive and snubbed. Further, U.S. companies would be hurt when sales abroad had to be converted from relatively weak currencies to the strong U.S. dollar.
There is no doubt that the global economy and strong dollar are making it tough on companies to compete and grow profits. Coca-Cola on Tuesday was among a string of multinationals this earnings period to mention the pressure and say it's likely to continue through 2015.
With two-thirds of the Standard Poor's companies done reporting, earnings growth is up just 3 percent, and companies have grown sales just 1.6 percent. But beating estimates carries a lot of weight, and 78 percent of companies have managed to do so, according to FactSet. The average over the last five years has been 73 percent.
Analysts now say earnings reports suggest investors were overly anxious in January. With earnings better than expected, and oil prices no longer appearing to drop on global economy concerns, stocks soared 3 percent last week -- recovering from the early 2015 jitters. The rally continued this week in large and small company stocks. The Dow Jones industrial average on Tuesday climbed 139 points to 17,868.
"We think the stronger dollar and weaker global economies headwinds are overblown," said Bank of America strategist Steven DeSanctis. "We observed little earnings growth difference between those companies with above-average overseas exposure versus those with below average."
Before earnings season, the mantra of analysts was that investors would be safer buying shares of companies that depend on U.S. customers, versus businesses focused abroad. But multinationals are doing better than expected in delivering pleasing profits.
"Multinationals continue to see a higher proportion of earnings-per-share beats than pure domestics," notes Savita Subramanian, a Bank of America strategist.
Part of the reason is that analysts slashed expectations for large multinational companies just ahead of earnings reports, so companies found it fairly easy to exceed the lower forecasts and delight investors with what are called "earnings beats" or "earnings surprises" -- earnings that are higher than predictions. But analysts didn't swing the hatchet as aggressively on forecasts for U.S.-centric business profits. Subramanian says analysts will be revisiting U.S.-focused earnings next.
When companies fail to live up to earnings expectations, investors often dump them and stock prices fall. That can also be the case when analysts start marking down expectations before official earnings reports.
Changing analyst expectations pulled many stocks down in January. But this reporting season, investors have embraced the companies that surprised them with stronger-than-expected earnings, and they have been less harsh than usual in punishing the stocks that have disappointed.
The average increase in stock prices for companies with stronger-than-expected earnings has been 1.8 percent, which is above the typical surge of 1 percent, said FactSet analyst John Butters. Usually, stocks plunge an average 2.3 percent if companies disappoint investors, but the price of an "earnings disappointment" for the fourth quarter has been 1.5 percent.
Some multinationals protected profits with hedging strategies, Subramanian noted.
Much of the downturn in earnings comes from energy companies. Oil prices plunged about 50 percent before seeming to stabilize during the past few days. And energy companies suffered a 21.5 percent decline in earnings, said FactSet. Energy sales are also dismal, with a decline of 14.5 percent for the quarter.
Health care, led by biotechnology, is reporting the highest earnings growth rate, at about 21.2 percent, and telecommunications involving companies such as Verizon Communications is the second best, at 21.1 percent.
Stocks on average remain expensive, which can lead to a sharp sell-off if investors suspect future earnings won't live up to expectations. FactSet notes that the price of large-company stocks is 16.9 times earnings expectations for the next 12 months. That's significantly above the 10 year average of 14.1 percent.
Small-company stocks also remain expensive despite a sell-off last year, DeSanctis said. "Valuations are still stretched and this is our biggest concern."
gmarksjarvis@tribune.com
Twitter @gailmarksjarvis
