Investors have been ducking – lying low while they hope corporate executives assure them over the next few weeks that companies have come through a soft patch and can produce strong profits in 2013.
The market has entered earnings reporting season for the last quarter of 2012, and with stocks near five-year highs, investors have been reluctant to take chances until they have more clarity.
“We are seeing tepid buying by institutions,” said Susan Schmidt, head of U.S. value equities at Mesirow Financial. “They know we’ve just had a strong run” in the stock market, and as investors look ahead at the first few months of 2013, “it’s like rolling dice.”
Investors aren’t certain how the U.S. debt ceiling debate and higher taxes will play on either consumer or corporate confidence, she said, and Europe’s recession is still tugging at profits worldwide.
Analysts had egg on their face in the third quarter, when they far underestimated the effect of the weak global environment on profits.
There was virtually no growth in third-quarter profits – just 0.1 percent – and revenues declined 0.8 percent. Companies have been commenting repeatedly about the challenging global environment, and throughout earnings season, investors will be listening for hints of weakness, said FactSet earnings analyst John Butters. Recently, Nike noted continued weakness in China, and Oracle and Accenture said the stronger dollar was a drag on earnings.
But since the beginning of the fourth quarter, analysts have slashed their expectations so dramatically for the quarter that companies may not have difficulty beating estimates. Analysts have cut growth projections from 9.2 percent to just 2.4 percent, said Butters.
“Since Wall Street focuses more on surprises than levels, investors may be in for a treat,” Standard & Poor’s strategist Sam Stovall said.
Butters says industrial companies, technology and health care are projected to report the lowest earnings growth. Declines in expectations are the most dramatic in airlines, with a decline of 21 percent; aerospace and defense, down 16 percent; and machinery, dropping 13 percent, Butters said.
In the basic materials sector, U.S. Steel, DuPont and Allegheny Technologies have experienced significant cuts in estimates, he added. Materials companies are only anticipated to have growth of 0.7 percent for the quarter, and energy is expected to decline 1.8 percent. Yet aluminum producer Alcoa reported sales Tuesday that were above estimates, despite slippage in earnings, and the stock held up after the market’s close when the company said it anticipates global aluminum demand to increase 7 percent in 2013. Technology companies, which depend heavily on purchases in Europe, also are expected to continue to feel the drag of Europe’s recession. Semiconductor companies are expected to have a 34 percent decline. Pharmaceutical companies, which also sell many products outside the U.S., are expected to report a 10 percent drop in earnings, Butters said.
“European austerity measures are expected to weigh on pharmaceuticals,” Stovall said.
Emerging markets have slowed, too, and “global economic weakness is certainly playing a role” in lower expectations, Butters said.
Companies sometimes provide guidance to investors prior to earnings season, and the most negative outlooks have come from technology companies. Ninety-one percent of those providing guidance have suggested that expectations were too high, Butters said.
“Earnings performance is paramount for investors,” said James Paulsen, chief investment officer for Wells Capital Management. And he expects investors to be on edge as they “worry future earnings growth will not be sufficient to keep the stock market rising.”
Profit margins are now near post-World War II highs, and Paulsen thinks earnings growth will be “much more modest” in future years. But he doesn’t think that suggests the stock market’s best days are behind it. While the strong earnings of the recovery have passed, he said, he also anticipates that as investors grow more confident about the future, they will be willing to pay more for stocks despite slower growth. So comments from executives about 2013 could be more significant than the quarterly results they will be reporting in the weeks ahead.Gail MarksJarvis is a personal finance columnist for the Chicago Tribune and author of “Saving for Retirement Without Living Like a Pauper or Winning the Lottery.” Readers may send her email at firstname.lastname@example.org.