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The American corporate profit machine is in full swing:
Stock market darling Google Inc. (NASDAQ/GOOG) reported late last week that its third-quarter profit hit $2.73 billion on sales of $9.72 billion. Earnings and revenue grew 26% and 33%, respectively, from the same period of last year.
This morning, troubled Citigroup, Inc. (NYSE/C) announced that it made $3.8 billion in its third quarter, an increase of 60% for the third quarter of 2010.
Another big U.S. bank, Wells Fargo & Company (NYSE/WFC), announced this morning that its third-quarter profit rose 21% to $4.1 billion from $3.34 billion in the third quarter of 2010.
What do these three companies have in common? They all beat stock market analyst profit expectations. Collectively, these companies booked profits of $10.63 billion in the three-month period ended September, 30, 2011.
While stock market analysts have been cutting their earnings expectations for corporate America, third-quarter earnings growth have been better than expected. Bellwether General Electric Company (NYSE/GE) reports its third-quarter profit later this week—and I believe it will surprise on the upside as well. The stock market has been very kind to this stock as of late.
Corporate America is faring better than what was expected. Again, I believe stock market advisors became too negative too quickly this summer. On the backdrop of negative stock market sentiment and rising corporate profits, the stock market is riding the wall of worry quite well.
But there is a big negative for the economy. Public companies will do whatever it takes to make their shareholders happy. And happiness comes from the higher stock market prices of companies. If earnings growth isn’t happening fast enough, companies will cut expenses to bring profits up. In most cases, payrolls are cut first, further impacting the unemployment rate in America.
Just look at these two reports from this morning:
The world’s biggest maker of lightbulbs, Amsterdam-based Royal Philips Electronics NV, a company most investors simply refer to as Philips, announced Monday that it plans to cut 4,500 employees to boost profits.
Lowe’s Companies, Inc. (NYSE/LOW), the big U.S. home-improvement retailer, said this morning that it will cut about 2,000 jobs and close 20 underperforming stores, as it tries to maximize profits.
Bottom line: companies are reporting better profits than expected. These same companies will trim payroll “on a dime” to improve earnings. Better earnings result in higher stock market prices. Stock market advisors were wrong in jumping into the bear market camp this summer. The stock market will ride the wall of worry higher, as the bear market rally continues.
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Michael’s Personal Notes:
According to the Census Bureau statistics, the median income in the U.S. has dropped seven percent from 2000 to 2010 after adjusting for inflation—the worst 10-year performance since the 10-year period ended 1967. The simple economic analysis: the standard of living in the U.S. is going down.
The obvious observation is that incomes are being held back because of high American unemployment. With U.S. economic growth expected at an anemic 1.5% this year, with the real estate market still in the tank, the chances of the American job market improving are meek at best. There are many risks still surrounding the economy…everything from the U.S. debt crisis to the euro crisis.
Where the Market Stands; Where it’s Headed:
Well, dear reader, this morning the Dow Jones Industrial Average opens up almost one percent for the year. We’ve heard all kinds of reasons this summer as to why the stock market rally was done. We saw stock advisor after stock advisor move into the bear market camp. But, as I had been predicting, the stock market would do the opposite of what is expected of it—and that’s exactly what we got.
There are many reasons why the stock market will move higher, the most important of which is the huge amount of negativity towards the stock market that overhangs it. There are more bearish stock advisors today than any time since March of 2009 (Source: Investors Intelligence). We all know what happened after March 2009. The stock market rose 100%.
What He Said:
“The Dow Jones Industrial Average, the S&P 500 and the other major stock market indices finished yesterday with the best two-day showing since 2002. I’m looking at the market rally of the past two days as a classic stock market bear trap. As the economy gets closer to contraction, 2008 will likely be a most challenging economic year for American.” Michael Lombardi in PROFIT CONFIDENTIAL, November 29, 2007. The Dow Jones Industrial peaked at 14,279 in October 2007. A “sucker’s rally” developed in November 2007, which Michael quickly classified as bear trap for his readers. By mid-November 2008, the Dow Jones Industrial Average was at 8,726.
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