Global Earnings Poised for 2014 Rise as U.S. Offset ChinaThomas Black
Global corporate earnings growth is poised to accelerate this year as higher spending by U.S. consumers and Europe’s gradual rebound from a two-year recession help offset a slower economic expansion in China.
3M Corp., which sells consumer, health-care, industrial and safety products around the world, said sales growth may double in the U.S. and demand is improving in Western Europe. Company earnings in Japan may rise about 9 percent in the next fiscal year as the weaker yen aids exporters such as Toyota Motor Corp., according to estimates compiled by Bloomberg. Even French carmaker Renault SA is projected to reverse a three-year slide in earnings this year as European car sales rebound.
“What we’ve got going on for the first time in this recovery is truly global synchronized growth,” said James Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management, which manages about $340 billion in assets. “It’s still slow by long-ago historic standards, but it will feel pretty good in this recovery.”
Growth for the U.S. and Europe at the same time, even if moderate, is a welcome change for company earnings, Paulsen said. The U.S. economy is projected to expand 2.8 percent, matching 2012 as the fastest pace since 2005, while the euro area is on track for its first annual growth since 2011. Although American retailers have been hurt as lower income families rein in expenses, carmakers are projected to sell more than 16 million cars in the U.S. for the first time since 2007.
European car sales are “going to get better for the first time after five years of a strong decline,” said Carlos Ghosn, chief executive officer of Renault, in an interview in Davos, Switzerland, last month. “We’re going to get back slowly to growth, moderate growth, 1 to 3 percent for the years to come.”
Earnings for companies in the Standard & Poor’s 500 Index are forecast to rise 8.5 percent in 2014 from 5.2 percent last year, according to data compiled by Bloomberg. About 79 percent of companies that have reported results for the fourth quarter have topped estimates, signaling that corporate profits were already gaining momentum at the end of 2013.
While 59 percent of companies in the Stoxx Europe 600 Index have posted earnings that trailed estimates for the fourth quarter, analysts are still forecasting profits for 2014 will increase about 13 percent. That would be a turnaround from a 5.6 percent decline in 2013.
“Of the big economies of the world, the U.S. at the moment is the healthiest,” said Bob Doll, chief equity strategist at Nuveen Asset Management in Chicago, which oversees $118 billion, including $8 billion in equities. “Earnings are going to be driven by U.S. growth and further recovery in Europe.”
Most companies already cut costs to drive earnings during the slow recovery from a 2009 recession and quicker economic growth will help push sales increases, said Jim Russell, who helps oversee $113 billion as a senior equity strategist for U.S. Bank Wealth Management. The World Bank and International Monetary Fund both raised their global growth estimates last month, boosting investor confidence, Russell said.
“We see company earnings doing a bit better than they did last year,” Russell said. “It won’t take much revenue growth to produce a meaningful jump in the bottom line because of the low expense structure.”
That’s giving executives confidence to invest, with U.S. capital spending in 2014 projected to exceed last year’s $2 trillion. UBS AG has predicted investment may rise 6.7 percent this year, up from 2.6 percent in 2013.
That optimism has been reflected in the stock market, with the S&P 500 and the Dow Jones Industrial Average both trading near record highs. Even Europe’s Stoxx 600 ended 2013 with a 17 percent annual gain, the biggest since 2009.
Some U.S. consumers are getting more comfortable after housing prices rebounded, the stock market surged about 30 percent last year and the unemployment rate reached the lowest since October 2008 in December.
Caterpillar Inc., the largest maker of mining and construction equipment, said last week that 2014 sales will be about $56 billion plus or minus 5 percent, higher than analysts estimated on average, as the recovery in the U.S. building industry spurs sales of bulldozers and excavators. The Peoria, Illinois-based company’s power systems and construction industries units may rise 5 percent in 2014.
“There are clear signs of economic improvement,” Dave Anderson, chief financial officer for Honeywell International Inc., said in an interview. “It’s a more welcoming environment, not in a bullish way, but the trends are generally positive.”
The Morris Township, New Jersey-based maker of aircraft electronics and building controls, which gets about 55 percent of its sales outside of the U.S., said 2014 earnings-per-share may increase by as much as 12 percent.
U.S. housing is on the mend, with builders starting work on 923,400 homes in 2013, an 18 percent increase from the prior year and the most since 2007. Vulcan Materials Co., the country’s largest producer of sand and crushed stone, will ride the recovery. The Birmingham, Alabama-based company may post earnings per share of 65 cents this year, ending four years of losses, based on the average of analysts’ estimates.
U.S. companies in the S&P 500 index are sitting on a record $3.6 trillion of cash and short-term investments, at the same time that interest rates are low and raw materials prices are in check.
Coupled with improving consumer sentiment, “that’s an environment where corporations should get modestly more revenue,” said Nuveen’s Doll, a former chief equity strategist for BlackRock Inc. “They’re not going to set the world on fire, but it’s enough to have some earnings improvement.”
Global businesses are seeing signs of growth across sectors. 3M, the St Paul, Minnesota-based maker of goods ranging from Post-it Notes to paint sprayers, said Jan. 30 that sales excluding acquisitions and currency translation will rise as much as 6 percent in the U.S. this year, up from 3.1 percent in 2013. The same day, Paris-based LVMH Moet Hennessy Louis Vuitton SA, the world’s biggest luxury-goods company, said growth in fashion and leather goods rebounded after a third-quarter slowdown, boosting optimism for a turnaround.
Profits in emerging markets may not keep pace with the developed world as China cools amid a shift to a more domestic-led economy after years of export-driven growth. China’s decreased appetite for raw materials is weighing on commodity-companies in countries such as Brazil and Chile.
European companies from London-based Diageo Plc to Unilever and Remy Cointreau SA have seen a slowdown in previously fast-growing regions. Diageo, the world’s largest distiller, missed sales estimates last week, as China and Nigeria weighed on revenue growth in the second half of the year.
Currency weakness this year in Argentina, Brazil, Turkey and South Africa underscores the emerging-market risk for companies, which take a hit upon translating sales back into their home currency when reporting earnings. Even the Canadian dollar has slumped about 4.6 percent against the U.S. dollar this year.
Brazil’s Vale SA, the world’s largest iron-ore miner, plans to cut investment to the lowest level since 2010 to boost profits. Vale’s iron-ore production is expected to be 306 million tons this year, lower than a forecast made a year ago of 326 million tons, the Rio de Janeiro-based company said in December. Based on average estimates, net income in dollars may rise 6.5 percent this year to $10 billion after peaking at $22 billion in 2011.
China, the world’s second-largest single economy, is forecast to grow 7.4 percent this year after 7.7 percent in 2013, according to data compiled by Bloomberg. That’s down from as much as 14 percent in 2007 when China was the world’s engine for growth.
Even with China trending slower, the world economy is forecast to expand 3.6 percent this year, according to 36 economists’ estimates compiled by Bloomberg, up from 2.9 percent in 2013. The U.S. may expand 2.8 percent this year while the euro area will grow 1 percent after contracting 0.4 percent, according to estimates compiled by Bloomberg.
Japan, the largest economy after the U.S. and China, is catching more investors’ attention as monetary easing and fiscal stimulus under Prime Minister Shinzo Abe spur an economic recovery. The yen has weakened about 18 percent versus the dollar since Abe took office in December 2012.
“The economic recovery now is different from previous ones because it started with a rise in consumer spending,” said Ryuta Otsuka, strategist at Toyo Securities Co. “Usually, it starts with an increase in exports.”
Japanese company earnings for the fiscal 2015 year that starts April 1, 2014, will probably gain 9 percent to 29.3 trillion yen, based on analyst estimates compiled by Bloomberg for about 1,000 of the largest companies on the Topix index. Toyota, the world’s largest automaker, will lead with annual net income of 2 trillion yen compared with 1.86 trillion yen in the current fiscal year, the data show.
“We’ve done this whole recovery without Japan and without Europe and I think we’ve got them both back,” Paulsen said. “The overall growth rate in the globe is going to be best it’s been in the recovery.”