While U.S. Households wait for a recovery in jobs, American corporations appear to have recovered.
Earnings season begins today, and investors cautiously expect good news. Corporate America anticipates a strong second quarter.
“It has been one of the strongest profits recoveries ever,” said David S. Bianco, chief equity strategist for Bank of America Merrill Lynch. “You have got to go back to the Depression to find a profits recovery that outpaces this one.”
Maybe so. But will these strong profits translate into high stock prices?
Richard Suttmeier, chief market strategist at ValuEngine.com, thinks last week’s powerful rally was the result of investors already pricing in strong earnings, and further advances in the major averages may not necessarily materialize despite good news.
Suttmeier said growing concerns among corporations of a possible double-dip recession may lead to a cautious stance regarding expenditures.
“Corporations are hoarding cash,” Suttmeier says. “But they’re not spending on capital expenditures, and they are not hiring.”
Analysts will be watching closely at guidance for clues to what executives are thinking regarding to the future of the world economy.
How will corporations respond to the expiration of federal stimulus programs? Are executives concerned with the financial crisis in Europe? What impact will the mid-term elections have on corporate strategy?
Since much of corporate America relies upon revenue from outside the United States—where household balance sheets are far healthier—corporate execs may view the outlook differently from the U.S. consumer’s concerns.
The rebound in corporate profits have come at the expense of jobs and discretionary corporate spending plans, as corporations cut overhead by closing plants and non-vital employees to fit new revenue streams and growth rates.
“You are going to hear outlooks from companies that are more upbeat than the sentiments you are going to get from workers and households,” Bank of America’s Bianco said.
In the meantime, earnings at industrial companies are expected to increase by approximately 30% during the second quarter. Railroads and airlines should improve earnings through cost-cutting measures and improved demand.
As long as there are no real surprises, the question on investors’ minds remains how does corporate America feel about the future. Will the talk center on a possible double-dip or will the outlook continue to imply incremental increases in corporate spending and hiring?
“The only thing anybody cares about now is what is going to happen in the next quarter,” said Howard W. Penney, a managing director for Hedgeye Risk Management.
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