RBC Says Corporate America May Be Maxing Out Profit `Levers'

(Bloomberg) -- U.S. companies are enjoying a good earnings season -- but their efforts to squeeze out profits may mean it’s harder to keep up that performance in the future, according to RBC Capital Markets.

“Many levers appear to have been pulled to get first-quarter 2019 earnings-per-share growth into positive territory for the S&P 500,” strategist Lori Calvasina wrote in a note Tuesday. We “are starting to question whether these efforts can be replicated in coming quarters.”

Robust buyback activity, a reduction in shares outstanding and pricing initiatives have been among steps taken to boost earnings-per-share, according to Calvasina. Cost-savings plans have been more in focus this reporting season than in the last few, she said.

RBC Says Corporate America May Be Maxing Out Profit `Levers'

About 76 percent of S&P 500 companies have beaten earnings estimates, according to data compiled by Bloomberg. Margin improvements via cost cuts have been a major driver of the better-than-expected results, Bloomberg Intelligence’s Gina Martin Adams said.

A recent report by Moody’s Investors Service Inc. suggested companies have pivoted to using tax reform primarily to reward shareholders, rather than to pay down debt and ramp up capital spending and outlays on research and development.

“While we applaud the determination of management teams to navigate the many pressures that confronted them during the quarter,” Calvasina wrote, “one of the biggest questions that we have coming out of reporting season is whether companies will be able to pull these levers again in coming quarters -- particularly if tariff headwinds strengthen.”

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