American businesses remain profitable. This quarterly earnings cycle is not a story of losses. It is a story of shrinking profits, and investor confidence that they will pick up again soon.
First quarter corporate financial results begin en mass in the week ahead. Dozens of household names turn in their data _ Citibank, PepsiCo and Whirlpool among them. While expectations vary across companies, overall profits are forecast to drop four percent compared with a year ago. When the quarter began, analysts were predicting profits for S&P 500 companies to grow by almost three percent.
Any fall off would represent the first year-over-year decline in quarterly profits in three years. And earnings are expected to be flat this quarter before picking up later in the year, according to financial data firm FactSet.
While profits may fall, FactSet's analysis predicts growing revenues _ slowing growth, but growth nonetheless. This dynamic of higher revenues but lower profits means companies are experiencing higher costs without the market power to raise prices fast enough for their products and services. What's causing the higher costs will be noteworthy for the economy _ higher wages and benefits, raw material costs, trade tariffs?
Investors seem ready for all this. The S&P 500 index is about 2 percent below its all-time high. It's rallied 15 percent so far this year even as earnings expectations have been dialed back.
A drop in profits does not necessarily lead to a drop in stock prices. After all, stocks trade as much on anticipation of the future as they do on the reality of the past and present. And investors clearly are optimistic the drop in profits will be short-lived.
