U.S. Corporate Profits on Pace for Third Straight Decline

logo-cropped-11U.S. corporate profits, weighed down by the energy slump and slowing global growth, this would mark the S&P 500’s third consecutive quarter of declining earnings.

Source: The Wall Street Journal

U.S. corporate profits, weighed down by the energy slump and slowing global growth, are set to decline for the third straight quarter in the longest slide in earnings since the financial crisis.

Weakness was felt across the board, with executives from Apple. to railroad Norfolk Southern and snack giant Mondelez International saying the current quarter remains tough. 3M, which makes tapes, filters and insulation for consumer electronics, forecast continued weak demand for that industry. Procter & Gamble reported sales declines in its five business categories despite price increases.

“It’s a difficult environment indeed,” said PepsiCo Chief Executive Indra Nooyi. “Most of the developed world outside the United States is grappling with slow growth. GDP growth in developing and emerging markets is also challenged.”

The concerns from company executives echo weak economic data released Thursday morning, which showed U.S. gross domestic product rose just 0.5% in the first quarter. Business investment and consumer spending on goods slowed, while consumer spending on services climbed.

“On the one hand, consumer spending continued to be the primary economic driver in the U.S. On the other hand, industrial production has been disappointing,” United Parcel Service Inc. CEO David Abney said after the delivery company reported a 3.1% revenue increase.

Based on the 55% of companies in the S&P 500 index that had already reported results Thursday morning, Thomson Reuters expects overall earnings to decline by 6.1% in the first quarter compared with a year earlier. Even excluding energy companies, which are expected to have their worst quarter since oil prices began to plunge in 2014, profits are on pace to fall by 0.5%. Revenues are expected to fall 1.4% overall, or rise 1.7% excluding energy, according to Thomson Reuters.

This would mark the S&P 500’s third consecutive quarter of declining earnings–the longest streak since the financial crisis. Revenues will have declined for five quarters in a row, outstripping even the four-quarter slide in 2008 and 2009.

Seven of 10 broad economic sectors in the S&P 500 including consumer staples and technology companies are expected to report flat to falling profits, while six are likely to report flat or declining revenues, according to data from Thomson Reuters.

Companies selling cars, auto parts, household appliances and other so-called discretionary goods to consumers are also doing well. Thomson Reuters expects them to report profits up more than 20% over the first quarter of 2015, the fastest growth in more than two years.

Lower gas prices appear to be prompting U.S. car owners to drive more, according to data from the U.S. Federal Highway Administration–raising demand for parts. Cheap financing has helped to stoke demand for cars, as have purchases by lower-margin fleet buyers.

That may prove unsustainable, Michael Jackson, chief executive of car-and-truck retailer AutoNation, told investors on April 22. “It’s not as strong out there as you might necessarily think,” Mr. Jackson said. “I think the economy has had a hesitation or a rough patch. We’ll have to see if it resumes its stride.”

For Whirlpool, the first quarter was a tale of two markets, strong at home and weak abroad. The appliance maker, which gets about half its revenues from North America, reported a 3% rise in sales in the region, and raised its predictions for industrywide sales growth to between 5% and 6% this year, up from an earlier projection of 5%.

“The global train is moving slowly, but the American consumers are powering it,” said Mark Zandi, chief economist of Moody’s Analytics.

But slower sales in Europe and Latin America, plus the impact of the strong dollar there and in Asia, led Whirlpool to report lower profits and sales overall, pushing its shares down 3.6% on Tuesday.

Similarly, economic and currency woes in Brazil helped throttle back sales of Harley-Davidson motorcycles there, and United Technologies reported continued declines in sales of elevators and other products in China.

Apple, which reported its first decline in quarterly revenue in 13 years, said sales in mainland China, excluding currency effects, fell 7% from strong results a year earlier. Apple shares lost 6.3% Wednesday following the results.

Mondelez CEO Irene Rosenfeld said the economies of Brazil and Russia have deteriorated further and consumer demand is being hit by higher prices. “Are we at the bottom?” Ms. Rosenfeld said. “What we’re seeing is certainly worse than what we were seeing last year.”

P&G has trimmed its predictions for overall growth in its markets to about 3% world-wide this fiscal year, down from earlier projections as high as 4%. More than 10% of sales at P&G come from tumultuous regions, like Russia, Ukraine, the Middle East, Turkey, Brazil and other parts of Latin America, Chief Financial Officer Jon Moeller said in the company’s Tuesday earnings call.

“There are more flashpoints across the globe than at any time in recent memory with significant economic and political instability impacting incomes and consumption in many large and important markets,” he said.

Ultimately, despite the resilience of the U.S. consumer, economic growth is likely to remain sluggish given continuing woes in emerging markets, sizable inventories, a still-strong dollar and still-weak capital investment, says Joseph LaVorgna, chief U.S. economist for Deutsche Bank.

“It’ll be hard to get a whole lot of corporate profit growth,” Mr. LaVorgna said. “It’s hard to get really bullish.”