Corporate profits come in unexpectedly strong

ByABC News
April 29, 2012, 7:26 PM

— -- Investors who doubted that companies could keep delivering profit growth are getting schooled on just how wrong they were.

Going into first-quarter earnings reporting season, companies were expected to deliver essentially zero profit growth. But with more than half the companies in the Standard & Poor's 500 now having reported first-quarter results, they've instead delivered 6.7% growth, on average, for the 10th-consecutive period of profit increases.

Such unexpected profit growth comes at a critical time for Wall Street, as investors look to justify the stock market's momentum, which is pushing nearly back to bull market highs. Friday, the S&P 500 closed just 1.1% shy of its 2012 high. The Dow Jones industrials came even closer, off just 0.3%.

Investors' low expectations set companies up for a good quarter, says Sam Turner at RiverFront Investment Group. "We're seeing the impact."

Investors, who largely expected a ho-hum quarter for corporate profits, are seeing positive signs in the form of:

•Banner number of companies beating expectations. So far, 81% of companies have beaten expectations, says John Butters at FactSet. "That's unusually high," topping the 72% of companies that, on average, beat estimates the past four quarters.

•Strength from sectors closely linked to the economy. Nearly all the corporate profit growth is being driven by three sectors — technology, financials and industrials — with 23.4%, 12.9% and 10.4% growth, respectively, Butters says.

•Evidence companies are beyond just cutting costs. Companies have reported 6.2% revenue growth, says S&P Capital IQ. While down from 10% revenue growth in the fourth quarter, it's still healthy at this point of the economic cycle, says Jack Ablin of Harris Private Bank.

There are, though, more troubling signs. Without Apple and financials, the S&P 500's growth would be 0%, Butters says.

Even so, investors are encouraged that analysts are standing by forecasts calling for accelerating growth the rest of the year. Corporate profits are expected to jump 16.4% in the fourth quarter, Butters says.

If companies deliver, stocks have more upside, says Alan Skrainka, strategist at Cornerstone Wealth Management. Analysts predicted faster profit gains in the second half. "That's how it's going," he says.