Global earnings set to climb as US offsets China

Published Feb 5, 2014

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Thomas Black Dallas

Global corporate earnings growth is poised to accelerate this year as higher spending by US consumers and Europe’s gradual rebound from a two-year recession help offset a slower economic expansion in China.

3M, which sells consumer, health-care, industrial and safety products around the world, said this week that sales growth might double in the US and demand was improving in western Europe.

Company earnings in Japan may rise about 9 percent in the next financial year as the weaker yen aids exporters such as Toyota Motor, analysts estimate. Even French car maker Renault 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 synchronised growth,” James Paulsen, the chief investment strategist at Wells Capital Management, said. “It’s still slow by… historic standards, but it will feel pretty good in this recovery.”

Growth for the US and Europe at the same time, even if moderate, was a welcome change for company earnings, Paulsen said.

The US economy is projected to expand 2.8 percent, matching 2012 as the fastest pace since 2005, while the euro zone is on track for its first annual growth since 2011. Although US retailers have been hurt as lower-income families rein in expenses, car makers are projected to sell more than 16 million cars in the US for the first time since 2007.

European car sales were “going to get better for the first time after five years of a strong decline”, Carlos Ghosn, the chief executive of Renault, said in Davos, Switzerland, last month. “We’re going to get back slowly to growth, moderate growth, 1 percent to 3 percent for the years to come.”

Earnings for companies in the Standard & Poor’s (S&P) 500 index are forecast to rise 8.5 percent this year from 5.2 percent last year. About 79 percent of companies that have reported results for the three months to December have topped estimates, signalling that corporate profits were already gaining momentum at the end of last year.

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 this year will increase about 13 percent. That would be a turnaround from a 5.6 percent decline last year.

“Of the big economies of the world, the US at the moment is the healthiest,” Bob Doll, the chief equity strategist at Nuveen Asset Management, said. “Earnings are going to be driven by US growth and further recovery in Europe.”

Jim Russell, a senior equity strategist for US Bank Wealth Management, said most companies had already cut costs to drive earnings and quicker economic growth would help push sales increases.

The World Bank and International Monetary Fund raised their global growth estimates last month, boosting investor confidence, he 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 is giving executives confidence to invest, with US capital spending this year projected to exceed last year’s $2 trillion (R22 trillion). UBS forecast investment might rise 6.7 percent this year, up from 2.6 percent growth last year.

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 last year with a 17 percent annual gain, the biggest since 2009.

Some US 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.

“There are clear signs of economic improvement,” Dave Anderson, Honeywell International’s chief financial officer, said. “It’s a more welcoming environment.”

US 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.

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 mining companies in countries such as Brazil and Chile.

But Japan, the third-largest economy, is catching more investors’ attention as monetary easing and fiscal stimulus spur a recovery. – Bloomberg

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