More U.S. executives than ever are increasing earnings forecasts compared with those lowering them, helped by almost $2 trillion of Federal Reserve spending and a recovery in the global economy.
EBay Inc., United Parcel Service Inc. and 196 other companies raised profit estimates above analysts’ projections last month as 130 firms cut them, the biggest gap since Bloomberg began tracking the data in 1999. Shipping companies and computer makers boosted forecasts the most, pushing the Morgan Stanley Cyclical Index of businesses most tied to the economy up 27 percent since July 2. That beat the 20 percent rally in the Standard & Poor’s 500 Index.
Companies are raising the outlook for U.S. profits at the same time the Fed is trying to prevent deflation and reduce unemployment by purchasing an additional $600 billion in Treasuries. The last time executives were this optimistic, stocks climbed 39 percent over the next 3 1/2 years, data compiled by Bloomberg show.
“It’s important for the rally and for the general health of the market that investors continue to anticipate higher earnings,” said Dean Gulis, who manages $3 billion for Loomis Sayles & Co. in Bloomfield Hills, Michigan. “That companies themselves are expecting better profits is very positive. As we see rising earnings, we’ll see improving stock prices.”
About 1.5 U.S. companies boosted earnings estimates above analysts’ forecasts for each that cut projections in October. That’s about three times the average of 0.59 in the past 10 years, data tracked by Bloomberg show. The ratio fell to a record low of 0.1 in December 2008, three months after New York-based Lehman Brothers Holdings Inc. filed for bankruptcy. When it reached 1.1 in March 2004, the S&P 500 rose from 1,126.21 to a record 1,565.15 in October 2007, Bloomberg data show.
The S&P 500 has gained almost 201 points since falling to a 10-month low on July 2 after companies from Baltimore-based T. Rowe Price Group Inc. to Google Inc. in Mountain View, California, topped analysts’ estimates and investors speculated the Fed would act to boost growth. The benchmark measure of U.S. stocks rose 3.6 percent to 1,225.85 last week, the fifth-straight gain. The S&P 500 slipped 0.2 percent to 1,223.25 at 4 p.m. in New York.
Earnings at EBay, the owner of the second most-visited e-commerce site, are getting a boost as consumers make more purchases online and use its PayPal service to handle money transfers. The San Jose, California-based company forecast more fourth-quarter sales and earnings than analysts estimated on Oct. 20, spurring the biggest gain in the shares in nine months.
Consumer borrowing in the U.S. unexpectedly increased in September by the most in two years, led by a surge in non-revolving credit such as college loans and auto financing, the Federal Reserve said on Nov. 5. The report was released the same day the Labor Department said employers added 151,000 jobs in October, more than twice the median economist prediction.
“We have outperformed our expectations through the first three quarters of the year, and enter the holiday season with confidence in our payments business,” said Bob Swan, EBay’s chief financial officer, on a conference call following the earnings release. “From a business standpoint, our global footprint is expanding.”
Rising international demand for everything from transportation services to tobacco and power tools is helping drive profits at companies such as UPS, Philip Morris International Inc. and Danaher Corp. While forecasts for U.S. gross domestic product in 2011 have fallen to 2.4 percent from 2.9 percent in July, the biggest emerging markets are expected to expand at least twice as fast, based on economist estimates and International Monetary Fund forecasts compiled by Bloomberg.
UPS, the world’s largest package-delivery company, raised its estimate for 2010 income on Oct. 21 and projected growth of 51 percent to 53 percent for the year. That would be the biggest annual earnings increase for the Atlanta-based firm since before 2000, data compiled by Bloomberg show.
Freight-train traffic has risen 16 percent since July 9, according to the Association of American Railroads. The index of carloads at the largest U.S. lines plunged 31 percent from its highest level in 2008 to May 2009, Bloomberg data show.
“Looking towards peak season, customer sentiment is mixed, but leaning towards cautious optimism,” UPS CFO Kurt Kuehn told investors and analysts on Oct. 21. “We’re expecting a good, strong fourth quarter, and I’m extremely confident we’re on our way back to the high levels of profitability that we’ve demonstrated in the past.”
Investors are betting profits at S&P 500 companies with the most sales outside the U.S. will beat the market. Corporations getting at least 50 percent of their revenue from foreign sources rose more than 10 percentage points more than American-focused stocks since July 2.
Earnings for the 30 companies in the Morgan Stanley index of economically sensitive shares will grow 25 percent next year, almost twice the rate of the S&P 500, according to analyst estimates compiled by Bloomberg. The cyclicals gauge trades for 12.2 times estimated 2011 earnings, or 0.5 point lower than the S&P 500, Bloomberg data show.
Philip Morris said on Oct. 21 that currency fluctuations, lower taxes and rising sales in countries from Algeria to Indonesia led the New York-based company to increase its 2010 income projection. The biggest publicly traded tobacco maker has advanced 30 percent since July 2.
“We have strong business momentum going into the fourth quarter and will benefit from higher margins in Japan as well as price increases in Argentina, France, Indonesia, Italy, Poland, Portugal, Russia and the U.K.,” said Hermann Waldemer, the CFO, in a conference call. “We have market leadership and are growing volume and overall share in emerging markets.”
Danaher cited faster growth in emerging markets as one of the reasons for increasing its 2010 profit forecast on Oct. 21 to between $2.25 and $2.30 a share, the highest since at least 1999, up from a range of $2.16 to $2.23. The Washington-based maker of Craftsman tools said on Nov. 4 that it gets about 20 percent of revenue from developing nations.
Increased regulation of the financial and health-care industries is leading businesses to outsource computer services, Cognizant Technology Solutions Corp. said on Nov. 1. The Teaneck, New Jersey-based provider of data systems support raised its 2010 earnings forecast and beat analysts’ third-quarter estimates. The shares are up 28 percent since July 2.
“Clients continue to search for cost savings in order to fund growth and innovation in other areas,” Chief Executive Officer Francisco D’Souza said on the call after the quarterly profit report.
Stock prices have already risen to account for higher corporate earnings and shares will require a strengthening economy to climb more, said Trym Riksen, chief investment officer for the private-banking division of DnB NOR ASA. The valuation for the companies in the S&P 500 has climbed to 15.3 times reported profit from the past year, from a 14-month low of 13.7 in July, according to data compiled by Bloomberg.
“This huge wave of positive guidance has already been priced into the market,” said Riksen, whose Oslo-based firm oversees the equivalent of about $391 billion. “It would be very surprising if that huge wave were to be prolonged.”
Rising raw-material prices are reducing profitability for Clorox Co., a maker of household-cleaning products, and apparel company Jones Group Inc. Earnings are being squeezed as companies struggle to pass costs onto shoppers at a time when year-over-year gains in the consumer price index have averaged 1.8 percent in 2010, compared with a 10-year average of 2.5 percent, data compiled by Bloomberg show.
Clorox lowered its annual profit forecast on Nov. 2, citing weakening U.S. growth and higher commodity costs. Shares of the Oakland, California-based company fell the most in almost two years. Jones Group cut its 2010 sales projection on Oct. 27 amid soaring cotton prices, which reached a record $1.446 a pound on Nov. 5. Shares of the New York-based clothing maker are down 8.3 percent this year.
Gains in U.S. GDP are trailing the average pace following a contraction, according to data compiled by the National Bureau of Economic Research and Bloomberg. NBER said the worst recession since the 1930s ended in June 2009, and Bloomberg data show GDP growth will average 2.5 percent a quarter through June 2011, or half the average rate in the two years following contractions since 1949.
Most companies are earning more than analysts expected. More than 70 percent in the S&P 500 beat profit forecasts in the July-to-September period for the sixth straight quarter, the longest streak in Bloomberg data going back to 1993. S&P 500 earnings since Oct. 7 were 7 percent higher than analysts predicted, the data show.
Brazil, Russia, India and China, the biggest developing nations, are forecast to expand more than the U.S. next year. Their growth will average 6.6 percent, according to the median economist forecasts in a Bloomberg survey and IMF projections.
“Earnings have been phenomenal out of corporate America,” Robert Doll, who oversees $3.45 trillion as chief equity strategist at New York-based BlackRock Inc., said in a Nov. 3 interview on Bloomberg Television’s “First Up” with Susan Li. “They’ve delivered versus expectations, yet again outshining the tepid economic recovery. I think that’s the real story.”