Review & Outlook

Our take on the investing, financial, & economic themes of the day

New Driver at the Wheel

2 June, 2011 by Ben O'Brien in Commentary

The first quarter of 2011 was another strong quarter for corporate earnings. With almost all of the companies in the S&P 500 reporting, about 77% have met or beaten earnings estimates. This is down a bit from the 86% for the first quarter of 2010, though it is still very good. It was the sixth consecutive quarter of double digit earnings growth. And yet the economic news for this period has been disappointing. So what is driving this strong performance if it’s not a strong economic recovery?

One bright spot in the domestic economy has been IT spending. Companies that held off buying new equipment during the recession are now restocking. This helped companies like IBM, Dell and Microsoft.

Both margins and sales growth also fueled earnings.  Overall net margins rose to 9.35%, up from 8.69% a year ago as companies continued to find ways to cut costs. Sales grew 8.7% up from 8.3% in the fourth quarter.

Perhaps the best explanation for the strong corporate performance despite weakness in the U.S. economy is strong international sales. Companies in the S&P 500 get as much as 45% of their earnings from abroad. The weak dollar and fast growing emerging markets have given a large boost to many companies. Wal-mart for instance posted strong sales overseas that gave the company a profit for the quarter despite a drop in U.S. sales.

All of this bears out the shift in market leadership from the American consumer to consumers in distant places. Yes, the American consumer has slid our of the drivers seat and Jose and Federico and Ramesh have taken his place at the wheel. Is that all bad? Not necessarily, but more on that later.