US company earnings soar, sales disappoint again

S&P earnsJul10.pngThe blog’s quarterly look at US company earnings reveals a worrying trend. As Howard Silverblatt, Senior Index Analyst for S&P, puts it “”no sales means no jobs, means no recovery“.

As the chart shows, Reported Earnings (red line) recovered strongly to $61 in Q1, and were back at Q1 2008 levels. Equally, as the Q2 earnings season begins, they are expected to be 43% above Q2 2009 levels. But companies remain cautious, with dividends (green line) back at 2005 levels and expected to show only a marginal increase.

This is probably due to the fact that Q2 sales growth is forecast at just 7%. Q1 sales for companies in the US S&P 500 were only 1.8% above Q1 2009 levels. Silverblatt’s latest report summarises the key issues:

Comparisons should focus on quarter-over-quarter results to determine the recovery’s progress, as well as the underlying momentum of the economy. And since I believe jobs are number one, and that companies are generally in good financial shape with excess cash (so they can ride out any short term disruption), I look to sales as a future indicator.

“On this basis, earnings are running ahead of Q1 2010, but sales are flat, and that’s the problem. It’s great that companies have improving earnings, but those improvements are due to high margins, which were the product of cost cuts – specifically job reductions, the very thing that we need to improve now.

“Until companies and consumers start to spend more, the job front will not get better. But they won’t spend more until they believe things are getting better. The stimulus programs were suppose to jump start the economy and break the downward cycle, by convincing both groups that better times were here. But so far we’re not seeing the sales or the jobs; but earnings are good, at least for now”.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.


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