This is an archived article that was published on sltrib.com in 2012, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.
Is the great profit engine of corporate America running out of steam?
While other parts of the economy struggled the past two years, large companies managed to rack up higher profits quarter after quarter. Now reality is catching up with big business.
As companies close their books on the final three months of last year, the big ones that make up the Standard & Poor's 500 stock index appear likely to earn about $230 billion $12.6 billion more than a year earlier.
But the increase, 5.8 percent, is less than half the speed at which quarterly profits grew the first nine months of 2011. In the average quarter since the beginning of 2010, earnings have grown five times as fast.
Analysts expect profit growth to accelerate later this year. But so far, almost all the growth comes from two companies, one of them among America's most favorite, the other among its most hated: Apple and the bailed-out insurance company AIG.
Take away those two companies and profits for the remaining 498 are expected to grow a measly 1.1 percent, according to FactSet, a provider of financial data.
The immediate future looks about the same. For this quarter, which ends March 31, profits for the S&P 500 are expected to be up about 1 percent from the year before. And that's with Apple and AIG thrown in.
In a report Thursday highlighting "unusually weak" results so far, Goldman Sachs strategist David Kostin noted that stock analysts have been cutting their estimates for what S&P companies will make for all of 2012.
His projection has profits rising 3 percent this year compared to 2011, and it has stocks in the S&P 500 no higher than they were when the year started.
The darkening profit picture comes at the wrong time for the economy, which is finally gaining momentum. The country added an unexpectedly robust 243,000 jobs last month, and unemployment has fallen to 8.3 percent, the lowest in three years.
Rising profits have helped the country heal from the recession. They have allowed companies to hire, invest in equipment and software and raise stock dividends. The danger is that as profit growth ebbs, so will the boost to the economy.
The reasons for the slowdown are myriad:
• Among the almost 300 companies in the S&P that have reported profits so far, some seem to have run out of ways to cut costs, and are making less profit from each sale, a first in the recovery. To help lift its drooping profit margins, for instance, Colgate-Palmolive said last week that it was raising prices in North America for the first time in two years. Profit fell 5 percent last quarter.
• Other companies point the finger overseas. Dow Chemical, the nation's largest chemical maker, blamed "considerable weakness" in debt-mired Europe for its profit last quarter of 25 cents per share, before a one-time charge. That was less than expected.
Others point to the strengthening U.S. dollar, which means profits that companies collect in foreign currencies like the euro translate into fewer dollars when they're brought home. In cutting profit forecasts for 2012, Procter & Gamble and Pfizer both cited the stronger dollar.
But perhaps the biggest reason for the small gains is simple: an investing version of the law of large numbers.
With profits crushed by the recession, it didn't take much early in the recovery for companies to report big increases. But now that profits have climbed fast for two years, it's harder to show a jump by a similar proportion.
Profits per share at Exxon Mobil rose just 2 percent last quarter, and the stock has fallen. But it still made $41 billion last year, more than the annual economic output of nearly half the world's countries.
To keep growing profits at the rate of the past year and a half, the company would have to earn $65 billion this year more than three times what it generated two years ago.
If profit growth for the S&P continues to ebb, it will mark the end of a remarkable run.
At the start of the bull market in March 2009, many professional investors worried that the weak economy would keep a lid on profits. But companies cut staff, squeezed more out of workers who remained and made more money than nearly anyone expected.
Skeptics noted that companies could only cut so much. But companies kept cutting and squeezing and posted even higher numbers. Then, when domestic revenue didn't grow as quickly as expected, companies compensated by finding buyers abroad, and posted higher profits again.