Where are the Profits?

February 7, 2012 • Local News

In [auth] this March 25, 2011, file photo, customers wait outside the Apple store in Munich before the start of sales of the iPad2. While the economy has struggled to recover over the past two years, big U.S. companies have not only generated profits but grown them, quarter after quarter.

NEW YORK (AP) — Is the great profit engine of corporate America running out of steam?

While other parts of the economy struggled the past two years, large companies managed to rack up higher profits quarter after quarter. Now reality is catching up with big business.

As companies close their books on the final three months of last year, the big ones that make up the Standard & Poor’s 500 stock index appear likely to earn about $230 billion. That would be $12.6 billion more than a year earlier.

But the increase, 5.8 percent, is less than half the speed at which quarterly profits grew the first nine months of 2011. In the average quarter since the beginning of 2010, earnings have grown five times as fast.

Analysts expect profit growth to accelerate later this year. But so far, almost all the growth comes from two companies, one of them among America’s most favorite, the other among its most hated — Apple and the bailed-out insurance company AIG.

Take away those two companies and profits for the remaining 498 are expected to grow a measly 1.1 percent, according to FactSet, a provider of financial data.

The immediate future looks about the same. For this quarter, which ends March 31, profits for the S&P 500 are expected to be up about 1 percent from the year before. And that’s with Apple and AIG thrown in.

In a report Thursday highlighting “unusually weak” results so far, Goldman Sachs strategist David Kostin noted that stock analysts have been cutting their estimates for what S&P companies will make for all of 2012.

His projection has profits rising 3 percent this year versus 2011, and it has stocks in the S&P 500 no higher than they were when the year started. That would reverse a strong 6.9 percent rise so far this year.

The darkening profit picture comes at the wrong time for the economy, which is finally gaining momentum. The country added an unexpectedly robust 243,000 jobs last month, and unemployment has fallen to 8.3 percent, the lowest in three years.

Rising profits have helped the country heal from the Great Recession. They have allowed companies to hire, invest in equipment and software and raise stock dividends. The danger is that as profit growth ebbs, so will the boost to the economy.

Profits per share at Exxon Mobil rose just 2 percent last quarter, and the stock has fallen. But the company still made $41 billion last year, more than the annual economic output of nearly half the world’s countries.

To keep growing profits at the rate of the past year and a half, the company would have to earn $65 billion this year — more than three times what it generated two years ago.

If profit growth for the S&P continues to ebb, it will mark the end of a remarkable run.

At the start of the bull market in March 2009, when stocks hit 12-year lows, many professional investors worried that the weak economy would keep a lid on profits. But companies cut staff, squeezed more out of the workers who remained and made more money than nearly anyone expected.
The stock market appears to be ignoring all this, and perhaps for good reason.

Investors buy and sell stocks mostly based on what they expect companies to earn in the future, not on what they made in the past. And though dour in the short run, investors expect big gains as economies of the U.S. and some of its big trading partners pick up later in the year.

Profits at aluminum maker Alcoa fell in the fourth quarter, and are expected to slump again this quarter. Yet its stock has risen anyway — 24 percent this year. The reason is that investors are banking on a 23 percent climb in earnings in the last three months of the year.

Overall, profits in the S&P are expected to jump nearly 18 percent in the final three months after a 5 percent increase in the first nine months, according to FactSet.

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