Corporate profits sagging

Bob Moon Feb 6, 2012

When there’s nothing better to do and still no word on a Greek agreement, Wall Street tends to start obsessing about “something that’s in its field of vision.”

With a fairly light week for economic data, investors have started focusing on a subtle shift in corporate profits. More than half the companies listed in the S&P 500 have already reported their earnings for the fourth quarter (October through December, 2011), and about two-thirds of them beat expectations. Sounds good, right? But that’s less than in recent quarters.

It may be a sign of a slowdown in the rising earnings that have laid the foundation for Wall Street’s surging corporate profits over the past several years.

We talked with Brian Gendreau, market analyst of Cetera Financial Group. He says corporate profits hit an all-time high in the third quarter of 2011, and, like a kid who can’t keep getting straight “A”s every semester, Gendreau says it’s unrealistic to keep expecting profits to go up, up, up.

With consumers demanding better and better deals, and prices of raw materials going up, companies are starting to feel a real squeeze. And in the wake of last week’s report that productivity is declining, it may be that companies are feeling some pressure to start hiring. Gendreau says that’s fairly typical after the initial stages of a recovery: “Companies are operating with very lean staffs, and they start to add temp workers, and finally they start hiring more full-time workers.”

Gendreau says all of this is actually good news for the real economy. “I think the season for big earnings gains is pretty much over,” Gendrea says. “On the other hand, it means employment’s rising and incomes are rising, and that provides a more solid foundation for the economy.”

A silver lining, perhaps?

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