Philip Morris International Inc. (NYSE/PM), an S&P 500 company in the consumer goods sector, reported disappointing corporate earnings for the first quarter of 2013. The company’s profits fell more than 1.6% from the same period last year. Wall Street analysts were expecting Philip Morris to show corporate earnings of $1.34 per share, but the company only earned $1.28 per share. (Source: MarketWatch, April 18, 2103.)
PepsiCo, Inc. (NYSE/PEP), another major company on the S&P 500, registered first-quarter corporate earnings that were 4.7% lower than the same period last year. (Source: Reuters, April 18, 2013.)
UnitedHealth Group Incorporated (NYSE/UNH), the largest health insurer in the U.S. and a constituent of the S&P 500, reported that corporate earnings fell in its first quarter due to rising medical and operating costs. UnitedHealth earned $1.16 per share—11.4% lower than last year’s first quarter, when corporate earnings were $1.31 per share. (Source: Reuters, April 18, 2013.)
Similarly, Nucor Corporation (NYSE/NUE), a steel producer on the S&P 500, reported a drop in corporate earnings of 39% in the first quarter of 2013. The company only earned $0.28 per share compared to $0.46 in the same quarter of 2012. (Source: CNBC, April 18, 2013.)
Dear reader, throughout history, the key stock indices have risen when their companies posted better corporate earnings. As it stands, big-cap companies haven’t performed as expected; rather, I see softer corporate earnings than before. In the first quarter, the S&P 500 companies are expected to show negative growth in their corporate earnings.
In the past, to boost their corporate earnings, some well-known companies on the S&P 500 bought back their shares and cut their labor forces to boost per-share earnings. These two practices can only last for so long.
The U.S. economy is not witnessing economic growth. At the very best, consumers are watching their pockets. Consumer confidence is bleak. The number of Americans using food stamps is increasing. When consumers spend less, businesses sell less. As corporate earnings continue to soften, we’ll see the demise of the rally in the S&P 500 and other key stock indices. In fact, it may have already started.
What He Said:
“Bonds could now be a buy: Bonds rise in price when interest rates fall as their return makes them more valuable. After a bear market in bonds that has lasted for months, the action in the bond market, as I read it, indicates the bear market in bonds could be over. I’ve always preferred quality when buying bonds, going with government bonds over corporate bonds. If you have some cash lying around, bonds could be a great deal.” Michael Lombardi in Profit Confidential, July 24, 2006. The yield on 10-year U.S. Treasuries fell from five percent in the summer of 2006 to 2.4% in October 2011—doubling the price of the bonds Michael recommended.