NEW YORK: Corporate America has a profit problem. Earnings of U.S companies are falling for the first time since 2009, when the economy was still reeling from the Great Recession.
The main culprit is the plunging price of oil, which has clobbered earnings at big energy companies such as Exxon Mobil and Chevron. Mining companies also have taken a beating because of tumbling prices for gold, silver and copper.
Earnings at energy companies dropped a staggering 59 percent in the third quarter, enough to drag the profit of all companies in the Standard & Poor’s 500 index down 1.5 percent, according to estimates by S&P Capital IQ. It’s the first quarterly decline in six years. Without the drag of energy companies, earnings would be up 6.2 percent.
To be sure, earnings are still high by historical standards, and the U.S. economy is continuing to slowly improve. But with stock indexes near record highs, the weak earnings make many stocks vulnerable to declines. And energy companies aren’t the only ones having trouble earning money, as several thorny problems continue to nettle Corporate America.
The strong dollar makes it much harder for U.S. companies to compete in foreign markets; slowing growth in other countries, especially China, means weaker U.S. exports; and in the past week, several big retailers such as Macy’s and Best Buy have reported weak sales and poor outlooks for the holiday shopping season.
This has a contributed to a trend that concerns some analysts even more than feeble profits: Revenue at S&P 500 companies has shrunk in all three quarters this year.
In the past, U.S. companies have been able push their earnings per share higher even despite decreases in revenue by cutting jobs, slashing other costs and spending huge sums of money, often borrowed at cheap rates, to buy back their stock. That all stopped working in the fall quarter.
“We’re at the point where we can’t get any more blood out of the stone,” said Kristina Hooper, U.S. investment strategist for Allianz Global Investors.
As a result, investors are going to need to be a lot more selective about what stocks they buy and not just assume that a recovering economy will mean equally good results for all good U.S. companies. For example, $1,000 invested in an index of S&P 500 energy stocks at the beginning of the year would be worth $866 today, while the same amount in the S&P 500 index would be worth $1,015.
That’s not to say, with quarterly financial results in from 473 of the companies in the S&P 500 index, that the earnings news is all bad. Big profit gains at Alphabet, Google’s parent company, the video-game-maker Activision, health-care companies and consumer giants such as Netflix and Amazon are helping to make up for the losses at energy and mining companies. In the fall quarter, earnings per share at consumer-discretionary companies rose 16 percent, and profits at telecommunications and health-care companies grew 15 percent, according to S&P Capital IQ.
But the skid in profits and sales helps explain why U.S. companies have been buying each other at such a fast pace. Many companies have been growing by making acquisitions rather than investing in their own businesses. That has helped drive the value of this year’s corporate deals to more than $3 trillion, according to Dealogic. That’s already a record for a year, and six weeks remain in 2015.
The barrage of deals has helped to lift stock prices, but once the merger frenzy abates, so too could the positive effect on the stock market.