New York: US companies from Intel to General Electric are caught in an earnings slump that shows few signs of improving until midyear as a weak global economy and gridlock in Congress weigh on profits.
Intel, the world's largest semiconductor maker, is poised to report its biggest quarterly earnings drop in 3 1/2 years this week, based on analysts' estimates compiled by Bloomberg.
GE, the maker of jet engines and electrical generation equipment, may post its slowest profit growth in three quarters.
The results would contribute to a predicted 2.5 per cent increase in fourth-quarter earnings for the Standard & Poor's 500 Index, the second-worst showing since 2009. Without a bump from financial companies that have cut jobs, the gain would be lower at 0.4 per cent. A pickup may start in the second quarter, when analysts foresee earnings rising 8.2 per cent from improving employment and housing and more clarity on government spending.
"Many companies slowed down their capital spending until they saw what was going to happen with the fiscal cliff," said Stanley Nabi, who helps manage more than $11 billion as vice-chairman of Silvercrest Asset Management Group in New York. "As employment increases, more people are earning income and spending. This supports the economy. We'll have higher profits because we're going to have higher revenue."
President Barack Obama signed a bill this month sparing most Americans from income tax increases while taxing top earners more. The move averted more than $600 billion in tax increases and automatic government spending cuts that were to start taking effect on January 1, the so-called fiscal cliff. The spending cuts were postponed for two months.
The fight has shifted to the need to raise the $16.4 trillion US debt ceiling by as early as mid-February to prevent a default. Congressional Republicans are trying to force Obama to accept cuts in entitlement programmes in exchange.
"Politics have never played such a huge role in determining the fate of the US economy," Diane Swonk, chief economist for Mesirow Financial Holdings in Chicago, said in a January 2 interview on Bloomberg Television. "They're really slowing things down and adding hesitation to an economy that's already at sub-par growth."
The political climate has weighed on spending by consumers and businesses. The US economy expanded at an estimated 1.5 per cent annual rate in the fourth quarter, less than half the 3.1 per cent pace of the three months ended in September. Over the past six months, companies reduced growth projections for fourth-quarter earnings to 2.5 per cent from nine per cent, said Nick Raich, research director at KeyCorp's private banking unit in Cleveland, which manages $25 billion.
Alcoa, the largest US aluminium maker and first member of the Dow Jones Industrial Average to post earnings, eliminated 12 per cent of its global smelting capacity last year on a surplus of the lightweight metal used in auto parts, aircraft and cans. New York-based Alcoa last week reported earnings of 21 cents a share after a year-earlier loss.
As the number of companies reporting earnings accelerates this week, Raich predicts most will beat their own projections for the just-ended quarter and then lower their targets for the current period. That pattern, similar to what has happened for the past six quarters, may be about to change, he said.
"The rate at which companies are cutting guidance is not as sharp as it was three, six and nine months ago," Raich said in a telephone interview. Over the next two or three quarters, a majority of companies will not only beat estimates but also maintain their guidance, he said.
"There's no doubt the fiscal uncertainty slowed activity in the fourth quarter," CEO Jeff Immelt told analysts last month. "We still see good earnings growth in the fourth quarter across the industrial platforms."
Santa Clara, California-based Intel on January 17 may report profit slumped about 29 per cent to 46 cents a share, following three straight quarters of declines or no growth, as consumers buy more tablets and smartphones instead of personal computers.
Microsoft, based in Redmond, Washington, is poised to report next week that net income fell about three per cent to $6.42 billion, based on the average estimate.