Corporate Earnings: Something Good Must Be Happening

Tis the season for public companies to report quarterly profits, and in keeping with the rest of the U.S. economy, the picture is "less bad" than six or 12 months ago. (It's still a limited sample, however, based on results of about one-fifth of the S&P 500.) Few companies are showing absolute gains in profits, but many are exceeding the estimates of Wall Street analysts.

The media giant Thomson Reuters tracks the details of earnings, and at noon today, of the 111 S&P 500 companies already having reported, about one-third showed earnings higher or in line with a year earlier, while two-thirds showed decreases.

The shortfall is both broad and deep. Giving the current situation historical context, the U.S. portfolio strategy group at Goldman Sachs observes that

...the current cycle represents the worst profit contraction since World War I and the Great Depression. S&P 500 LTM earnings have already declined by 53% since their peak in June 2007, marking the third worst contraction in the past century.

Here are a few household-name examples of the mixed picture -- year-over-year comparisons of companies in the Dow 30 that have reported June 2009 results. (Most are first half 2009 earnings per share versus first half 2008, as compiled by 123jump.com; a few compare three quarters or a full year. Companies showing increases are in bold.)

Retail: Home Depot down 25%; Wal-Mart up 8%

Pharma: Pfizer down 10%

Consumer Staples: Procter & Gamble up 27%; Coca-Cola up 9%

Technology: Cisco Systems down 11%; Microsoft down 10%; H-P up 18%

Industrials: Boeing down 18%; Caterpillar down 87%; GE down 47%

To fulfill the "good things" alluded to in my headline, however, consider that a supermajority of companies are ahead of plan: relative to expected earnings, 71 percent beat analyst forecasts while 20 percent fell short (9 percent were in line). Again, thanks to John Butters, head of U.S. equity research for Thomson Reuters.

And going forward, Goldman Sachs's prognosticators have come out of the foxhole and increased their profit forecast for corporate America:

We are raising our 2009 and 2010 operating earnings estimates for the S&P 500 to $52 (from $40) and $75 (from $63) reflecting year/year growth of 5% and 45%, respectively. The $12 per share increase in our profit forecast for each of the next two years stems primarily from a lower estimate of provisions and write-downs in the Financials sector.

Goldman also looks for the stock market to rise:

We are increasing our year-end 2009 price target for the S&P 500 to 1060 from 940 reflecting a potential price return of approximately 13% from current levels. To put our price target in context, a S&P 500 return of 13% over six months would be in-line with the 14% mean return during the six-month long "sustained rally" recovery periods after the five bear markets since 1970.

I suppose we should listen to Goldman; even though everyone has put them in the doghouse lately for not acknowledging the role of bailout funds in their record profits, they still look like the smartest guys around.