As the US markets continued to move past 11,000 points on the DOW in April 2010, investors and policy makers should focus their attention on earnings reports and away from distracting sideshows. Many expect that the gains of the last 12-13 months (almost 70% for the DOW) aren’t likely to be repeated any time soon and that the easier part of the recovery may be behind the markets. Moving forward, market gains are likely to face periodic headwinds and will continue to rely on growth in revenues and earnings.
Focus on Revenue and Earnings Growth
With unemployment still in excess of 9%, the nation’s attention must continue to focus on earnings and investment. Economists will point out that only businesses create jobs and they only do so towards the latter part of a recovery, after there has been sufficient growth in revenues and profits to justify investing in growth to support the increasing demands of the market place.
As further proof of the strength of the current economic recovery, many of the nation’s most important firms have announced impressive revenue and earnings growth for the 1st Quarter 2010 compared to the same period in 2009. The following are a small sampling of those reported most recently:
- Apple posted profits of $3.07 billion compared with $1.62 billion.
- Illinois Tool Works posted $294 million in net profits versus $8.1 million.
- Citigroup’s earnings climbed to $4.4 billion from $1.59 billion.
- Yahoo’s profits increased to $310 million from $118 million.
- United HealthCare’s earnings rose to $1.19 billion from $984 million.
- Goldman Sachs posted a 91% increase to $3.46 billion from $1.81 billion.
- Union Pacific’s earnings jumped 43% to $516 million from $362 million.
In the midst of the 1st Quarter 2010 earnings reporting season, the S&P 500 crossed the important 1,200 mark and the DOW fortified its position north of 11,000. These levels will only be supported by continued earnings growth as briefly discussed in the April 6, 2010 issue of Signature Update (Earnings Expectations and Tobin’s Q).
Other earnings reports of interest are Harley Davidson and Coach; important brands when considering consumer preferences and higher-end consumption patterns. Though neither firm reported record earnings, both beat analyst expectations and reported both earnings and revenue improvements over prior periods.
Unwise to Bet Against Small Business and Consumers
Though there will certainly be earnings disappointments as well, the trend towards higher revenues and earnings offers important evidence that the economy is headed in the right direction. Economist and former Assistant Secretary of Commerce, Dr. Quincy Krosby, points out that the markets may experience a “tug of war” in coming months as sovereign debt issues and likely interest rate increases become important factors. But even Krosby warns against betting on US small business and consumers, suggesting that businesses and consumer will always find a way to prosper.
Among the “head winds” that may lie ahead are near-certain tax increases for consumers and increased borrowing costs for businesses. As unwelcome as these may be, it’s possible that they’ll come in moderation. If President Obama keeps his campaign commitment to lower corporate business tax rates, the aggregate impact on the economy could be negligible; sadly campaign promises are much like devalued currency – they’re hard to spend and most often buy very little.
Though investors may have already gathered the easier gains from the recovery, the US markets are likely to trend higher on improving revenues and earnings. Once businesses have recovered sufficiently to round out inventories and replace outdated equipment, the employment market can expect to experience a sufficient rebound to move the economy into a post-recession/post-recovery period of sustainable growth and market gains.
Disclosure: No positions in stocks mentioned