Amid Mixed Economic Signals, One Reason for Optimism

We like to keep our eye on corporate earnings reports for a simple reason: Earnings results can influence a company’s decision on hiring or firing, which impacts spending and the economy.

So during a winter where we’ve noted that economic growth is somewhat fragile, we are looking for signs of softness in earnings reports, which could be a sign of further problems to come. This morning, our senior research fellow Bob Hughes said he’s been somewhat reassured by what he’s seen so far.

In making that assessment, he takes a broad view of businesses, looking at the Standard & Poor’s 1500, which includes a wider cross section of corporations than the S&P 500. So far, 495 of the 1,505 companies in this index have reported earnings, he said.

When you blend those reports with analyst projections of those that haven’t filed, corporate earnings growth in the fourth quarter of 2015 is projected to be down 6.0 percent, compared with the same quarter in 2014.

But much of that decline has been expected, Hughes said. The energy industry, under enormous pressure by global forces, accounts for 5.7 percentage points of the 6.0, he noted.

Sectors also contributing toward that decline include the materials sector – commodities, essentially – as well as technology and industrial businesses. That weakness, especially in the face of a strong dollar and weaker global growth, is also not surprising, he said.

But the sectors of telecommunications companies, health care, and makers and sellers of consumer discretionary goods and services are all showing positive earnings growth, he said. A strong showing by health care companies, in particular, is important to sustain a healthy jobs situation, he said.

“The earnings season so far, while it’s not booming or gangbusters, it’s probably good enough to continue to support jobs gains,” Hughes said. Of course, he cautioned, there are plenty more reports to be seen.