US corporate profit growth slows as Europe drags

United States corporations ended 2011 with the slowest profit growth in two years as the mending economy that lifted Macy’s Incorporation was met by a European slump that vexed companies more tied to global sales, such as Cisco Systems Incorporation.

Standard & Poor’s 500 Index companies may have earned $24.74 a share in the fourth quarter, according to analysts’ estimates compiled by Bloomberg as of January 6. The projected six per cent gain is the smallest against a year-earlier quarter since September 2009, just after the US recovery began.

“Slowing global growth, some impairment of export activity to Europe and perhaps even the rise of the dollar collectively have begun to sort of work against the multinational story,” chief investment strategist at Philadelphia- based Janney Montgomery Scott LLC, which manages $54bn, Mark Luschini, said. While growth is still “subpar,” he said he intended to invest more in the US to avoid higher international risk.

The US jobless rate fell in the final four months of 2011 and economic growth may rise to 2.1 per cent in 2012, the average estimate of economists in a Bloomberg survey. The European Union may contract by 0.2 per cent, its second slowdown in four years, and China’s 8.5 per cent growth would be the lowest in 11 years.

“I’m growing more optimistic that the economic activity in the US is firming to the point that it’s durable,” he said.

Overseas demand that propelled US profits a year ago may wane as European nations trim budgets to deal with their debt crisis and a slowdown in China hurts commodity-tied developing nations, said Chad Morganlander, a Stifel Nicolaus & Company money manager in Florham Park, New Jersey.

Alcoa Incorporated, the largest US aluminum producer, plans to release results today after markets close, the first company in the Dow Jones Industrial Average to report. Investors will be watching to see how the difference in economic trends in the US, Europe and Asia affect companies’ earnings.

“There’s going to be a big dichotomy between US exporters and domestic-focused US companies,” said Jacques Porta, a fund manager at Ofi Patrimoine in Paris, who helps oversee about $400m.

US payrolls rose 200,000 in December, double November’s gain. Average jobless claims for the four weeks ended December 31 dropped to the lowest since June 2008. A measure of consumer confidence ended 2011 at a five-month high. And manufacturers reported growth in December was the fastest pace in six months.

In Europe, where austerity measures are tightening and unemployment remains at a 13-year high, data show households and businesses are more reluctant to spend. In China, residential property values are falling and the ruling Communist Party is shifting focus to supporting growth rather than damping inflation as Europe’s debt crisis threatens to curb exports.

“A pronounced deceleration of global economic growth will bleed into earnings” for some US companies, said Morganlander, whose firm oversees more than $107bn in client assets. He predicts S&P profit will drop in 2012, the first annual decline since 2008.

Philip Orlando, chief equity strategist at Federated Investors Incorporated in New York, which oversees $355bn, is less pessimistic, saying the stronger US economy probably boosted S&P 500 company earnings by about 10 per cent for the fourth quarter, and should support six per cent growth for 2012.

“It’s not going to be a phenomenal quarter, but a nice solid quarter,” said Orlando.

US growth will help boost profits for companies that get almost all of their revenue from home, such as retailers, said Orlando. Macy’s had a better-than-expected holiday season and other retailers got a boost from inventory restocking during the fourth quarter. There is a risk that discounts to lure in shoppers may lower profit margins, Orlando said.

Apple Incorporated, spurred by holiday sales of the iPad, is predicted to report net income rose 56 per cent to about $9.35bn for the quarter ending in December, slightly higher than earnings growth of 54 per cent for the previous quarter.

Alcoa, which relies on markets outside the US for about half its revenue, said January 5 it will close 12 per cent of its smelting capacity after aluminum prices tumbled 18 per cent in 2011 as the economic slowdown made some smelters unprofitable.

Analysts have cut their fourth-quarter earnings estimates for Alcoa in the past month to a 1-cent loss, from a projected 7-cent profit 30 days ago. The New York-based company reported profit of 21 cents a year earlier.