Corporate earnings will continue to slump into the first half of this year amid the first simultaneous recessions in the US, Japan and Europe since World War II, analysts said.
Earnings at Standard & Poor’s 500 companies will probably fall in the first half, marking eight straight quarters of declines. In Europe and Asia, the outlook may be even worse as the recession curbs demand for retail goods and exports.
“It’s going to be a miserable ride,” said Bruce McCain, chief investment strategist at Cleveland-based Key Private Bank, which manages about US$30 billion.
Earnings probably won’t rebound until the end of this year, he said.
“The market recovers, then the economy recovers, then finally the earnings recover,” he said.
Companies are battling falling consumer demand and dwindling cash flows after banks tightened lending to cope with billions of dollars of real-estate losses.
“We hit the peak in earnings in 2007, and in 2009 we’re going to see continued deterioration,” said Diane Garnick, who helps oversee US$500 billion as an Invesco Ltd investment strategist.
Analysts’ earnings estimates are “still way too optimistic.”
In the US, profit at Standard & Poor’s 500 companies will fall 11 percent in the first quarter, followed by a 6.2 percent drop in the following three months, data compiled by Bloomberg said.
Earnings should improve in the second half, driven by a rebounding financial industry, the data showed.
While profits will rise 4.3 percent for the full year in the US, earnings in Europe are projected to decline for all of the year and analysts predict worsening reports out of Asia because the recession hasn’t fully hit there yet.
The energy industry will lead US declines, with earnings estimated to drop 29 percent this year. At Irving, Texas-based Exxon Mobil Corp, the world’s biggest publicly traded company, earnings will probably tumble 39 percent to US$28.2 billion, the first decline since 2002, a Bloomberg survey of analysts said.
“We expect industry earnings to be down sharply, especially in exploration and production,” said Gene Pisasale, who helps manage US$13 billion at PNC Capital Advisors in Baltimore.
Earnings at US retailers will fall 20 percent this year, analysts’ estimates said. The International Council of Shopping Centers in New York predicts 73,000 US stores may shut in the first half of the year after what may have been the worst holiday-shopping season in 40 years. That’s after about 148,000 stores closed last year, the most since the 2001 recession, the trade group said.
“You’ll see department stores, specialty stores, discount stores, grocery stores, drugstores, major chains — either multi-regionally or nationally — go out,” said Burt Flickinger, managing director of Strategic Resource Group, a retail-industry consulting firm in New York.
Wal-Mart Stores Inc, the largest retailer, may report a 6 percent profit increase this year by offering lower prices to consumers seeking bargains, estimates said.
Some of the biggest US banks will probably post higher profits this year compared with last year, when finance companies wrote down more than US$720 billion of losses.
“For the large financials, it’s going to be a very difficult year,” said David Burg, a Purchase, New York-based analyst at Alpine Woods Capital Investors LLC, which manages about US$6.5 billion, including JPMorgan shares. “The story for 2009 continues to be radical transformation — companies fundamentally changing their business model.”
Technology will be one of the best-performing sectors in the second half as customers start to increase budgets, said Pete Sorrentino, senior portfolio manager for Cincinnati-based Huntington Asset Management, which oversees US$16.5 billion. Earnings at software and services companies may rise 8.1 percent this year, while profits at hardware makers may slip 6.7 percent, analysts’ estimates said.
Healthcare will be one bright spot, as sick people still need medical treatment, said Les Funtleyder, an analyst with Miller Tabak & Co in New York. Profit at Standard & Poor’s 500 drug companies and medical equipment makers, such as Johnson & Johnson and Pfizer Inc, may increase 6.8 percent this year.
“Healthcare tends to be recession-resistant,” Funtleyder said. “Some people may use fewer drugs, so that’s obviously a bad thing, but it’s less cyclical than other industries.”
Half of Asia will probably be in recession this year as a US$700 billion drop in export earnings causes economies in Japan, Hong Kong, Singapore, South Korea and Taiwan to shrink, according to Macquarie Group Ltd.
Japanese corporate earnings may extend their slump after the yen rose against all major currencies last year and eroded the value of exports.
Credit Suisse Group AG estimates earnings will be weakest in the first half at carmakers, machinery producers and technology companies.
Vehicle demand from emerging markets, where automakers had counted on sales shoring up collapsing demand in the US, Europe and Japan, is also likely to decline as fallout from the credit crunch and economic slump spread, said Song Sang-hoon, a Seoul-based analyst at Kyobo Securities Co.
“No one will be immune from this downturn. It’s time to see who’s losing least, not who’s winning more,” he said.
Asian banks will grapple with falling earnings and rising defaults on loans this year as economies from China to Australia slow, prompting central banks to slash interest rates, said Tim Rocks, an Asian equities strategist at Macquarie in Hong Kong.
“This quarter and the first quarter [this year] are just going to be really ugly quarters,” said Frederic Dickson, who helps manage about US$19 billion at D.A. Davidson & Co in Lake Oswego, Oregon. “It’s just going to take a long time to get confidence restored.”
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