Traverse City Record-Eagle

Archive: Tuesday

February 7, 2012

Corporate profit growth rate slows

Apple Inc. and AIG skew snapshot of economic health

THE ASSOCIATED PRESS Associated Press

NEW YORK — 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 in 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, and one-fifth the speed they have grown since the beginning of 2010.

What's more, almost all the profit 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 no better. 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.

"Were the economy to sustain a shock, this makes us more vulnerable," said Barry Knapp, chief U.S. stock strategist at Barclays Capital.

In a report last week 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 just 3 percent by the end of the year, 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.

Text Only