America’s big corporations are expected to report strong profit gains for the April-to-June period, suggesting the economy may have more kick left than recent data indicate.
That would be particularly good news for the stock market, which has marched to a series of stunning new highs despite talk of an economic “soft landing” and a possible recession. Profits are the main engine that drives stock prices higher.
Second-quarter earnings are expected to come in 20.9 percent above the same period last year, according to IBES Inc., a New York-based provider of corporate earnings information.
That number represents the average profit gain of the 4,700 companies IBES follows. For the companies that comprise the S&P; 500 stock index, IBES estimates growth of 19.8 percent, compared with 21.4 percent in the first quarter and 20.6 percent in the final quarter of 1994.
Many who follow the economy attribute corporate America’s strong earnings performance to the wave of cost-cutting of the past few years.
“This restructuring is paying off,” said Bill Berger, chairman of Berger Associates Inc., a Denver-based mutual fund company. “We’ve been though a lot of agony, a lot of people have paid a big price and a lot of people are still paying a big price. But we had to do it.”
U.S. corporations today are more productive than they have been for many years, due in large part to reductions in staff and the addition of new technologies and procedures.
That has given them the ability to profit even from small increases in sales. Thus, earnings have grown even as the economy has slowed.
Companies already have begun to report their second-quarter results, though the bulk are yet to come, and a number of big names have announced quite-strong performances.
International Paper Co. this week reported earnings more than tripled in the period, Motorola Inc. said profits were up 29 percent, Nike Inc. said earnings were up 64 percent and Weyerhaeuser Co., a paper producer, posted earnings growth of more than 90 percent.
According to IBES, the strongest performances are expected from makers of basic goods. The best earners should be producers of metals other than steel, natural gas, forest products, containers and steel, respectively.
The greatest profit declines are expected from homebuilders, alternative energy producers, precious metals firms, auto companies and home furnishing sellers, in that order.
Strong earnings growth from basic goods makers usually comes late in an economic recovery. That’s because early on they keep prices low to generate sales, but later must scramble simply to meet orders. At that point they tend to raise prices, thus increasing profits.
Strength in those industries appears to jibe with government data suggesting the economy’s growth phase may be nearing an end. But analysts say it does not portend an economic breakdown, particularly since earnings from those companies are expected to be so strong.
“Profits are a source of cash flow, or the stuff that will lead to strong business investment in the upcoming quarters,” said Hugh Johnson, chief investment officer at First Albany Corp.