Business news junkies know the monthly indicator of inflation–the consumer price index–frequently is reported without “volatile food and energy prices.”
The underlying trend in inflation is better understood, at times, without two critical components that often fluctuate for temporary reasons.
This year, the same reasoning applies to corporate profits. Quarterly profits of major U.S. companies are rebounding from year-ago levels. But the rebound is much less when you subtract energy companies.
For example, Thomson Financial/First Call, a service that tracks earnings estimates and reports, says profits in the third quarter–July to September–for the major companies in the Standard & Poor’s 500 index will be up 10.5 percent from the third quarter of 2002. “Excluding the energy sector, it would be only 4 percent,” First Call said in its latest forecast.
Oil companies profit in times of war, when energy supplies are threatened. If you don’t expect a bulge in oil company profits for the first quarter, you don’t understand much about capitalism.
The more troubling news is the sluggish rebound in non-energy profits.
The ritual of quarterly profit reports gears up this week, with Abbott Laboratories, Genentech and Yahoo among the companies scheduled to post results Wednesday.
The inability of corporate America to gain traction in making profits retards a stock market rally.
This view is not the exclusive domain of market pessimists. Even optimistic analysts are worried.
Seattle-based Market Profile Theorems, an independent investment research firm, is forecasting that the Dow Jones industrial average will hit 11,300 by the end of the year, up 3000 points, or 36 percent, from the current level.
But Michael Painchaud, research director for the firm, says the momentum of corporate profit growth slowed in March. He’s not sure whether the deceleration in profits was a “hiccup” or a “storm cloud on the horizon.”
He is sure that the best profit growth can be found in the oil industry. But he’s also optimistic about upbeat earnings surprises from such non-energy companies as Allstate, Blockbuster and Select Comfort.
Ironically, he’s pessimistic about one of the biggest names in the energy sector: oil services giant and former Dick Cheney employer Halliburton.
“Despite an ongoing cyclical rebound in earnings, the strength of this recovery in earnings is weak,” agreed independent analyst Jack Tilton in his weekly forecast for Dallas-based Channel Trend.
“Aggregate fundamental earnings and earnings power of the companies in the S&P 500 are declining.”
Tuesday’s action: Stocks closed lower in light trading, as investors looked beyond exuberance based on U.S. military achievements in Iraq.
Oil prices rose, reflecting worries that OPEC would tighten the spigot. Treasury securities rallied on stock market weakness and worries about the post-war economy.
The Dow Jones industrial average slipped 1.49, to 8298.92. DuPont and General Motors led the Dow losers. Walt Disney, another Dow component, dropped 61 cents, to $17.13, as the second most active stock on the New York Stock Exchange. Morgan Stanley trimmed its profit forecast for the company.
On the upside, Altria Group, parent of Philip Morris, gained 98 cents, to $30, recovering slightly from a recent sell-off.
The Standard & Poor’s 500 index lost 1.64, to 878.29. The Nasdaq composite index dropped 6.57, to 1382.94. The Russell 2000 index lost 1.91, to 374.66.
NYSE trading volume reached 1.22 billion shares. Losing stocks outnumbered winners by a 9-7 ratio among NYSE-listed stocks.
Nasdaq volume totaled 1.28 billion shares, as losers outnumbered winners by 4-3.
Crude oil rose 4 cents a barrel, to $28.
Local news: Chicago-based food and consumer products manufacturer Sara Lee said it opposed a so-called mini-tender for up to 5 million of its shares by TRC Capital at $19.25 a share. Sara Lee shares closed at $19.79 in Tuesday’s session.
– Chicago-based trucking firm USFreightways dropped $1.66, to $25.59. The company warned late Monday that first-quarter earnings would be half its previous forecast.
