Week of Earnings Beats Can’t Jolt U.S. Stocks From 30-Day Rut

(Bloomberg) -- U.S. corporations are reporting annual profit growth for the first time in six quarters, but investors don’t seem too excited about it.

The 116 companies in the S&P 500 Index that have reported third-quarter results grew profits by an average 3.8 percent over the past year, according to data compiled by Bloomberg. Analysts now expect year-over-year profit will be flat once the June-to-September reporting is finished, likely bringing an end to the longest earnings recession since the financial crisis.

While that reasonably could be expected to bolster optimism among investors looking to pile into an aging bull market with stretched stock valuations, the U.S. presidential election and the threat of an interest-rate hike have kept gains in check. The benchmark for American equity barely budged in the week, finishing 0.4 percent higher at 2,141.16, as it careened within a rut it’s carved over the past month.

“It underscores the uncertainty right now,” said Ernie Cecilia, chief investment officer at Bryn Mawr Trust, which oversees $9.6 billion in Bryn Mawr, Pennsylvania. “There’s a reluctance to take long positions. That uncertainty has to do with earnings, the elections, and the Federal Reserve. There’s this reluctance to drive valuations higher.”

That’s not to say earnings haven’t mattered to individual stocks. Microsoft Corp. climbed to a record, Netflix Inc. surged the most in 18 months and PayPal Holdings Inc. notched its best week since January after results topped estimates. The gains pushed the Nasdaq 100 Index to a 0.9 percent advance for the week.

For the S&P 500, though, the reporting season has been a non-event. The benchmark equity index is little changed since Alcoa Inc.’s results landed with a thud on Oct. 11, the worst start to earnings since the first quarter of 2016, when gauge was mired in an 11 percent correction.

There haven’t been many big swings in the index in the past month, when daily moves have averaged 0.49 percent, down from 0.64 percent over the past year. The gauge has traded in a range of about 50 points since Sept. 9 and is up just 0.6 percent since then.

Heading into the earnings season, investors anticipated better-than-expected results could jolt stocks back toward the record 2,190.15 reached Aug. 16. That hasn’t happened and it’s not because the numbers look particularly bad. Seven of 11 sectors have posted profit growth, while earnings have beaten expectations by an average of 6.7 percent. If that trend continues, the S&P 500 will deliver higher earnings for the first time in 18 months.

That hasn’t been enough for investors staring at stock market valuations that are near the highest in two decades after a 7 1/2-year bull run and assessing the ability of the economy to sustain near-record equity prices amid rising odds for a Fed rate hike. The likelihood of higher rates by the December meeting climbed to 69 percent Friday, the highest since May, Fed funds futures show. 

The dollar has risen in tandem, climbing for a third straight week to the highest level since March. A stronger greenback damps earnings prospects for companies that derive a large portion of their sales overseas. It also makes commodities from metals to oil less attractive, hurting miners and energy producers.

Recent data have done little to allay concern that the world’s largest economy can pick up growth to sustain an increase in corporate profits. A report on consumer prices provided evidence inflation was getting closer to the Fed’s goal, while new-home construction unexpectedly dropped and more Americans than expected made initial jobless claims. A Bloomberg index measuring the degree to which economic data beats expectations fell back into negative territory.

American executives have been unusually reluctant to issue projections of future profit growth, according to data compiled by Bloomberg and Bank of America Corp. during the current earnings season.

There were 20 companies that provided new forecasts for quarterly or annual earnings in the first 17 days of October, roughly one-third of the normal volume. The 21 outlooks issued in September were the fewest on record.

The U.S. presidential election may be giving executives pause, according to Bank of America strategists. Investors are closely watching polling numbers ahead of the vote on Nov. 8. Health-care companies are down more than 3 percent his year as investors assess how the industry will fare should Hillary Clinton be elected president.

“Something’s got to give,” said Terry Morris, manager director of equities at BB&T Institutional Investment Advisors, from Wyomissing, Pennsylvania. “Either the market has to go up or earnings estimates have to come down and it does seem like it could be earnings estimates coming down. Companies are getting maybe more cautious about their forward earnings and to be fair, expectations are very high.”

To contact the reporters on this story: Oliver Renick in New York at orenick2@bloomberg.net, Rebecca Spalding in New York at rspalding@bloomberg.net. To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net.