U.S. companies from Intel Corp. (INTC:US) to General Electric Co. (GE:US) are caught in an earnings slump that shows few signs of improving until midyear as a weak global economy and gridlock in Congress weigh on profits.
Intel, the world’s largest semiconductor maker, is poised to report its biggest quarterly earnings drop in 3 1/2 years this week, based on analysts’ estimates compiled by Bloomberg. GE, the maker of jet engines and electrical generation equipment, may post its slowest profit growth in three quarters.
The results would contribute to a predicted 2.5 percent increase in fourth-quarter earnings for the Standard & Poor’s 500 Index, the second-worst showing since 2009. Without a bump from financial companies that have cut jobs, the gain would be lower at 0.4 percent. A pickup may start in the second quarter, when analysts foresee earnings rising 8.2 percent from improving employment and housing and more clarity on government spending.
“Many companies slowed down their capital spending until they saw what was going to happen with the fiscal cliff,” said Stanley Nabi, who helps manage more than $11 billion as vice chairman of Silvercrest Asset Management Group in New York. “As employment increases, more people are earning income and spending. This supports the economy. We’ll have higher profits because we’re going to have higher revenue.”
President Barack Obama signed a bill this month sparing most Americans from income tax increases while taxing top earners more. The move averted more than $600 billion in tax increases and automatic government spending cuts that were to start taking effect Jan. 1, the so-called fiscal cliff. The spending cuts were postponed for two months.
The fight has shifted to the need to raise the $16.4 trillion U.S. debt ceiling by as early as mid-February to prevent a default. Congressional Republicans are trying to force Obama to accept cuts in entitlement programs in exchange.
“Politics have never played such a huge role in determining the fate of the U.S. economy,” Diane Swonk, chief economist for Mesirow Financial Holdings Inc. in Chicago, said in a Jan. 2 interview on Bloomberg Television. “They’re really slowing things down and adding hesitation to an economy that’s already at sub-par growth.”
Congress has raised or revised the debt ceiling 79 times since 1960, including 49 times under Republican presidents, according to the Treasury Department.
The political climate has weighed on spending by consumers and businesses. The U.S. economy expanded at an estimated 1.5 percent annual rate in the fourth quarter, less than half the 3.1 percent pace of the three months ended in September.
Over the past six months, companies reduced growth projections for fourth-quarter earnings to 2.5 percent from 9 percent, said Nick Raich, research director at KeyCorp’s private banking unit in Cleveland, which manages $25 billion.
Alcoa Inc. (AA:US), the largest U.S. aluminum maker and first member of the Dow Jones Industrial Average to post earnings, eliminated 12 percent of its global smelting capacity last year on a surplus of the lightweight metal used in auto parts, aircraft and cans. New York-based Alcoa last week reported earnings of 21 cents a share after a year-earlier loss.
As the number of companies reporting earnings accelerates this week, Raich predicts most will beat their own projections for the just-ended quarter and then lower their targets for the current period. That pattern, similar to what has happened for the past six quarters, may be about to change, he said.
“The rate at which companies are cutting guidance is not as sharp as it was three, six and nine months ago,” Raich said in a telephone interview. Over the next two or three quarters, a majority of companies will not only beat estimates but also maintain their guidance, he said.
GE at the end of this week may say it earned 43 cents a share in the fourth quarter, based on analysts’ average estimate (GE:US). A few months ago, the average prediction for the Fairfield, Connecticut-based company was 47 cents a share.
“There’s no doubt the fiscal uncertainty slowed activity in the fourth quarter,” CEO Jeff Immelt told analysts last month. “We still see good earnings growth in the fourth quarter across the industrial platforms.”
Santa Clara, California-based Intel on Jan. 17 may report profit slumped about 29 percent to 46 cents a share, following three straight quarters of declines or no growth, as consumers buy more tablets and smartphones instead of personal computers.
Microsoft Corp. (MSFT:US), based in Redmond, Washington, is poised to report next week that net income fell about 3 percent to $6.42 billion, based on the average estimate. The October release of a new Windows operating system and its first computer, a tablet called Surface, failed to revive the declining PC market or stanch the shift of consumers to tablets such as Apple Inc.’s iPad, said Colin Gillis, an analyst at BGC Partners LP in New York, in a note to clients.
Earnings may drop 3.7 percent to $13.35 a share at Apple, its first decline in about a decade. The year-earlier quarter, aided by iPhone demand, was a record for Cupertino, California- based Apple and one of the most profitable in corporate history.
Caterpillar Inc. (CAT:US), the world’s largest maker of construction and mining equipment, may post its first year-over-year quarterly profit decline in three years amid weaker global economic growth. Earnings may decline 26 percent to $1.71 a share for the three months through December, the estimates show.
Combined earnings for five of the largest U.S. airlines may drop 56 percent from a year earlier. Higher fuel prices ate into profits while the economy limited their ability to raise fares. Atlanta-based Delta Air Lines Inc. (DAL:US)’s profit may fall 39 percent to 28 cents a share.
Ford Motor Co. (F:US) and General Motors Co. (GM:US) are trading near 18- month highs after the U.S. auto industry’s best sales year since 2007. Later this month Ford may report adjusted profit of about 26 cents a share, or 28 percent higher than a year earlier, according to the estimates. GM’s earnings may have risen to 51 cents a share from 39 cents.
Banks are faring better than many industrial companies, generating profits four years after the financial crisis. Near- record low interest rates are spurring homeowners to refinance and helping borrowers’ financial health improve, allowing lenders to set aside fewer loan-loss reserves.
Wells Fargo & Co. (WFC:US), the largest U.S. home lender, last week reported fourth-quarter earnings climbed 24 percent after extending more loans.
For the March-to-June quarter, banks, automakers and retailers will lead profit growth by S&P 500 (SPX) members, analysts estimate. Earnings growth may reach 9.2 percent in the third quarter, the estimates show.
U.S. unemployment will decline to 7.5 percent in 2013, helped by the addition of about 1.9 million jobs, Silvercrest’s Nabi predicted. Joblessness stood at 7.8 percent in December, down from a 26-year high of 10 percent in October 2009.
The gain in hiring may spur consumption and higher revenue for companies “that have already cut everything they can cut,” said Walter “Bucky” Hellwig, who helps manage $17 billion of assets at BB&T Wealth Management in Birmingham, Alabama.
Stock markets have anticipated the recovery, led by banks, brokers and insurers. The S&P 500 climbed 13 percent in 2012 as the benchmark index for American equities extended its rally since March 2009. The index fell 0.1 percent to 1,470.68 at 4 p.m. in New York yesterday, hurt in part by a slump in Apple amid concern about iPhone sales.
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