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US markets: US could have a good year
As we head into the fourth-quarter earnings season, the key questions are whether US companies can keep growing their earnings.
Last year, US corporations grew their earnings 20 per cent year on year in the second and third quarters.
If analyst estimates are accurate, profit growth for the last quarter of the year will drop sharply, to just 9.2 per cent. The main contributor to the double-digit expansion in the second quarter was the energy sector, where earnings jumped over 60 per cent thanks to the surge in oil prices. The West Texas Intermediate crude oil spot price averaged $76 from July to September 2010 compared with $90 for the same period in 2011.
While the average in the most recent fourth quarter was a bit higher still, the increase over the price in 2010 is less. Earnings growth has also slowed, with companies in the sector expected to post just a 20 per cent improvement, still the second highest among the 10 sectors.
If you exclude the energy sector from calculations, year-on-year earnings growth in the second quarter of 2011 drops to 14 per cent, but even then the forecast for the third quarter of 2011 excluding energy stocks is still half that rate, 7.7 per cent. Every other sector in the index is expected to show lower earnings growth, and two – materials and telecom services – may well show declines.
The only part of the index which should improve its performance is the financial sector, but this is entirely due to AIG, which reported a huge $16/share loss in the last quarter of 2010. Without the comparative boost from the fourth quarter of 2010 to the fourth quarter of 2011 for AIG, earnings growth for financial stocks turns slightly negative.
In the long run, it is earnings that determine stock prices, but with the high level of anxiety about the state of the global economy, sentiment has often been the driving factor. We expect aversion to risk to slowly decline this year, however, which should lead to rising valuations for equities generally. We expect low double-digit returns for US equities this year, which could well put them again among one of the better performing developed markets in 2012.
Dan Morris is global strategist at JPMorgan Asset Management
