Jim McCaughan: Q3 Earnings Will Surprise on Upside

Tuesday, 09 Oct 2012 08:04 AM

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U.S. companies begin releasing third-quarter earnings this week, and while the period might be the worst for the year, expect surprises on the upside, said Jim McCaughan, CEO of Principal Global Investors.

Expectations are low, which gives companies some room to beat expectations, but the underlying U.S. economy is showing signs of improvement on its own, which could buffer quarterly earnings statements.

“Clearly the third quarter, with all of the economic jitters there have been, is poised to be probably the worst quarter of the year in terms of earnings. But I do think it might not be as bad as people think,” McCaughan told CNBC.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

On top of cooling growth rates, the country will face at a combination of expiring tax cuts and automatic spending cuts kicking in at the same time, a combination known as a fiscal cliff that could send the country into a recession next year if left unchecked by Congress.

Waning growth rates in Asia coupled with the ongoing European debt crisis could bruise results, as well.

Still, the U.S. housing sector, which threw the country into recession and has lagged on its recovery since, is showing signs of improvement as is the labor market.

“The other thing that I would point to are the job numbers and the housing market. Both are suggesting the U.S. economy is doing reasonably well. Against that background, I see the likelihood of some modest positive surprise and then some momentum in sentiment pushing towards the year-end.”

The U.S. unemployment rate fell to 7.8 percent in September from 8.1 percent in August, the Bureau of Labor Statistics reported recently.

The economy created a net 114,000 nonfarm payrolls in September, while households reported that total employment rose by 873,000 in September following three months of little change.

The number of unemployed Americans stood at 12.1 million in September, the fewest since January 2009.

The Bureau of Labor Statistics added the number of nonfarm payrolls created in August was revised up to 142,000 from 96,000, while July’s figure was revised up to 181,000 from 141,000.

Economists attributed the decline in the headline unemployment rate not so much due to September’s payroll increase of 114,000, but rather, to a gain in part-time hiring that would be reflected in the household survey.
Gains in part-time workers might indicate small businesses are ramping up operations a little more, which could prove positive for the world’s largest economy.

“So, what the difference between the household survey and the employer survey suggests to me is that maybe small businesses, which are not fully captured in the payroll numbers, and maybe self-employment have actually been improving,” McCaughan said.

“I think you could see it as partly just a seasonal adjustment, but I do think it is modestly positive news and probably not as confusing as some observers have suggested.”

Other noted investors agree that a bleak outlook gives companies wiggle room to surprise on the upside, especially in a global economy marred by uncertainty in the United States, Europe and Asia.

“Companies are masterful at convincing analysts things are going to be terrible and that ends up not being the case,” said Dan Greenhaus, chief global strategist at brokerage firm BTIG, according to The Wall Street Journal.

“It’s the quarterly game that everybody plays and pretends not to be playing.”

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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