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In a telling indication that business is strong, a greater percentage of U.S. companies is exceeding sales forecasts than at any time in the past four years, helping drive the biggest stock market rally since 1936.
Caterpillar (CAT) and United Parcel Service (UPS), whose construction equipment and delivery businesses make them barometers for the economy, are among the 71 percent of Standard & Poor's 500-stock index companies whose revenue topped analyst estimates last quarter, the largest proportion since at least 2006, according to data compiled by Bloomberg. Sales beat projections by an average of 2.2 percent, the most in two years, the data show.
While earnings gains can result from cost-cutting (companies fired as many as 8.75 million workers from January 2008 through February 2010), the sales momentum is a sign that basic business demand is strengthening and may be a prelude to increased hiring that would buttress the recovery. "Sales tend to be highly correlated to economic activity," says Greg Woodard, a strategist at Manning & Napier in Fairport, N.Y., which manages about $36 billion. "We're starting to see the very early signs of hiring."
Total revenue for S&P 500 companies may rise 7.5 percent this year, the most since 2007, to an all-time high of $1,017.44 a share, according to analyst estimates compiled by Bloomberg. Sales fell 13 percent from September 2008 to March 2009.
Caterpillar, the world's largest maker of earth-moving equipment, said it added about 19,000 jobs last year, including 7,500 positions, a 15 percent increase, in the U.S. The company, based in Peoria, Ill., beat analysts' projections for fourth-quarter sales by 11 percent, the biggest margin in almost three years. The shares gained 64 percent last year and reached an all-time high of $100.61 on Feb. 8.
"You're definitely going to see an increase in hiring in almost every industry this year," says Eric Green, a money manager at Penn Capital Management in Philadelphia, which oversees $5.6 billion. "As demand goes up, you need to have employees working."
At Google (GOOG), executives are preparing for the biggest year in employee growth in the company's history. The owner of the world's most popular search engine, which plans to hire at least 6,000 people this year, posted revenue that beat forecasts by 5.1 percent on Jan. 21, Bloomberg data show.
The stronger results helped the S&P 500 hit 1,324 on Feb. 8, a 31-month high. It has surged 96 percent since March 2009, the biggest advance for a comparable period since 1936, according to Howard Silverblatt, an index analyst for S&P. David Bianco, chief U.S. equity strategist at Bank of America (BAC), predicts the index will hit 1,400 by the end of the year. On Jan. 31 he wrote: "Better-than-expected sales growth means earnings growth is being driven not by cost-cutting but by improving demand."
The bottom line: Sales growth is a sign the economy is reviving and may encourage companies to hire, strengthening the recovery.