Although the equity market has been pretty tired and trendless since the beginning of the year, earnings are holding up. Of course, there are always disappointments from quarter to quarter. Johnson & Johnson (NYSE/JNJ) didn’t have a particularly great quarter recently. And neither did 3M Company (NYSE/MMM).
But while international businesses are feeling the effects of a stronger U.S. dollar, sales and earnings estimates for 2016 continue to be quite strong.
A lot of businesses currently predict much-improved business conditions for next year. The equity market knows this. It is thus a contributing factor to recent strength in the main market indices.
Global growth expectations have been reduced for 2015. The Federal Reserve is on tap to change monetary policy from below market interest rates. Earnings expectations for 2016 are stronger than this year and corporate balance sheets remain strong.
That’s a lot of certainty for the equity market, along with many reasonable expectations.
So while doom and gloom sells more newspapers, it’s more important to follow what the equity market is actually doing as well as what underlying businesses are reporting.
Alaska Air Group, Inc. (NYSE/ALK)
Once again, Alaska Air Group, Inc. (NYSE/ALK) announced excellent financial results. The company achieved a record first-quarter net income of $149 million, or $1.12 per diluted share, compared to $94.0 million, or $0.68 per diluted share, in the first quarter of 2014.
Operating revenues improved four percent in the most recent quarter to $1.27 billion.
Dramatically lower fuel costs (including hedging) helped the company’s bottom line tremendously.
Alaska Air Group’s first-quarter dividend is up 60% over last year.
Southwest Airlines Co. (NYSE/LUV)
Southwest Airlines Co. (NYSE/LUV) also reported record first-quarter earnings. They improved dramatically to $453 million, or $0.66 per diluted share, compared to $152 million, or $0.22 per diluted share, last year.
Operating revenues also achieved a new record, up six percent comparatively to $4.4 billion with freight revenues improving by double digits over the first quarter of 2014.
Naturally, the equity market has already bet on robust airline earnings. Many of these stocks experienced excellent capital appreciation last year.
I don’t view the consolidation in the Dow Jones Transportation Average as a signal that the broader equity market is breaking down. It’s just natural trading activity after such tremendous capital gains. (See “Bull Market Over? These Stock Market Trends Say No.”)
Union Pacific Corporation (NYSE/UNP)
One transportation stock that well illustrates the current state of things in the industrial economy is Union Pacific Corporation (NYSE/UNP).
This is an important benchmark company. It’s worth following its business conditions even if you aren’t interested in the stock.
UNP saw its 2015 first-quarter earnings per share improve nine percent comparatively. The company’s first-quarter sales fell just slightly to $5.6 billion.
Management said that lower fuel surcharges as well as volume declines in coal and intermodal shipments were the reasons for the flat revenues.
What Does This Mean for Earnings?
That makes for pretty good earnings on declining top-line growth. It’s a story the equity market has seen in recent economic news.
The bottom line? This equity market is still all about the Fed. That’s it. It remains a slow-growth environment with decent corporate earnings.