First-quarter earnings so far from across the market are coming in better than expected — largely as a result of a very low bar.
The results have some people now uttering economic buzzwords like "deceleration," "signs of recovery," "the bottom" and the very precise "less bad".
More than half the companies in the S&P 500 have reported their first-quarter results. Of those, 65 percent beat analyst expectations. But overall, results were still down roughly 30 percent from a year ago.
"It's bad — but it's not as bad as we thought," said Bob Doll, global chief investment officer for equities at investment manager BlackRock.
The quarterly results hint at signs of recovery, but the picture remains very murky. It's unclear if the banks at the heart of the meltdown are seeing better results because the worst is over or due to the benefit of new accounting measures. And some retailers, who are the litmus test of consumer spending, say the worst in their earnings reports may be over but only due to tighter inventories, job cuts and store closures.
Even within industries, the reports were a mixed bag.
In the technology sector, one of the highlights came from Apple Inc., where strong iPhone sales helped boost quarterly profit 15 percent. But more often, the recession took its toll, even on names like Google Inc. The company's profit rose 9 percent for the quarter because of cost-cutting, but revenue grew at the slowest rate in Google's history as a public company.
Doll noted that across the board, most of the companies that beat expectations did so through cost reductions rather than showing top-line growth.
In other words, the better results came from job cuts and store closures during the quarter, rather than more cars and refrigerators being sold.
For example, in restaurants, sit-down chains like the Cheesecake Factory reported better-than-expected profits as sales slid because it was able to offset sales and traffic declines with cost cuts. Meanwhile, fast-food chain McDonald's Corp. saw its first-quarter profit climb nearly 4 percent as more customers worldwide came to them for a lower-priced meal.
In airlines, the largest U.S. companies again posted losses for the quarter, although not as bad as analysts expected. Delta Air Lines and United Airlines parent UAL Corp. lost $1.2 billion between them and AMR Corp., the parent of American Airlines, lost $375 million. But low-cost carriers JetBlue and AirTran managed to post profits.
The airlines saved on fuel costs, which were almost half what they were a year ago in some cases. But fewer passengers on fewer planes kept revenue down. And many were hurt by fuel hedges, paying higher prices they had locked in last summer.
Airline CEOs focused on a glimmer of hope — saying bookings seemed to be picking up a little — but a turnaround was not yet in sight. They are hoping more travelers will fly again by the end of the year to put more carriers in the black.
Chief executives from many companies — ranging from top performers like Apple to Proctor & Gamble, which this week reported its first quarterly loss in eight years — have all couched their comments by saying given the economy, they were pleased with results.
"There are two different things here: How does this compare to the (historic) cycle? And the answer is awful," said Jim Swanson, chief investment strategist at MFS Investment Management in Boston. "But when everyone has the mindset it's going to be awful, it's not so bad."
Banking was one of the brightest spots. The better-than-expected results for banks reassured many investors that the industry is not as sick as many feared when 2009 began.
Most big banks that got federal funding last year — including Goldman Sachs Group Inc., JPMorgan Chase & Co., Bank of America Corp., and Wells Fargo & Co. — posted profits after most posted massive losses in the fourth quarter. Strong bond and currency trading, low borrowing rates, and a pickup in mortgage refinancing were the key drivers.
But many of the financial companies' results were marked by odd accounting twists that kept many investors skeptical about the industry's health.
Citigroup Inc., for example, posted a much smaller first-quarter loss to common shareholders than analysts predicted, but only after reporting a $2.7 billion accounting gain because the value of its debt on the market fell. Essentially, the bank benefited because bond traders lost confidence in the bank's creditworthiness during the first quarter.
The opposite happened to Morgan Stanley. The investment bank had to take a larger-than-expected first-quarter loss because the value of its debt gained in the market.
While it's unclear how much the accounting maneuvers are helping the picture, investors remain optimistic that a financial recovery may be under way and are closely watching the financial industry.
"History tells us that banks have to be the first sector to come out of the recession," Swanson said. "That is more true this time."
The outlook from major U.S. corporations, or from the few that are issuing guidance for 2009 and beyond, is tentative at best.
"The guidance is still pretty negative," Swanson said. "They haven't joined the optimism bandwagon."
He said even the strongest companies are only talking about stabilization in the coming quarters, but overall companies are setting the bar as low as possible.
"It ain't great because this is a bad recession, but it isn't getting worse," Swanson said. "But that's all I ask for is a little stabilization."
Any road to recovery is going to be long and bumpy, investment officers said.
Howard Silverblatt, senior index analyst at Standard & Poor's, said looking forward, so much of what is anticipated is based on good faith.
While companies and investors may view the first quarter as a turning point, there are still unemployment figures and other influencing economic indicators such as unemployment figures, which are scheduled to be released next week and may show a bleaker picture of the U.S. economy. And as corporations begin the nuts-and-bolts planning for 2010, "if they don't see good things they are going to react."
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