This is an embarrassing time to be a corporate analyst. Seventy-five percent of the 151 companies in the Standard and Poor's 500 index that have announced third-quarter earnings so far have beaten analyst predictions of their earnings per share.
That could mean one of two things: either analysts are bad at their jobs, or corporate America is finding ways to make money that aren't easy for an analyst to pick up.
The second option is more likely, and that says a lot about why the economy seems to be sputtering along even though companies are prospering. A big part of company profit is coming from cutting costs and minimizing tax charges, two aspects of a business that are difficult to predict.
"Virtually all of the beats are being driven by the cost line," said Jonathan Golub, the chief U.S. market strategist at UBS Securities. "Investors are realizing that this is a cost-cutting exercise and not a sales growth exercise."
In the short run, strong company profitability is not going to help an unemployed person get offered a new job. But these earnings reports do show that the economy is growing, albeit unevenly. What can investors can take away from the last few weeks of this earnings season?
Consumers are spending, but cautiously
Consumers spent $14 billion, or 8 percent, more on things like clothing, cars and cruises over the past quarter than they did at the same time in 2009, according to research by Standard and Poor's.
Companies that focus on affordability account for most of the gains. McDonald's Corp. brought in more customers than it has in 20 years with its expanded Dollar Menu, while online movie rental company Netflix Inc. ended September with 52 percent more customers compared with the same time last year.
"Consumers just have to be shown a good value proposition and they are confident enough to add services and spend money," said Brad Sorensen, a director of research at Charles Schwab. "As we head into the holiday season, that's an encouraging sign."
Shipping and heavy industry are improving
Companies that typically take the lead as the economy comes out of a recession are bringing in more revenue and customers. That's usually a sign that business activity is starting to pick up.
Consider the following news that investors got from bellwether companies last week, all in the span of just of a few days:
— Boeing Co. said it plans to sell more commercial airplanes than it originally forecast this year
— United Parcel Service Inc. raised its earnings predictions and said the average number of packages it ships every day in the U.S. rose 3.6 percent
— Caterpillar Inc. said it continues to see strong demand in developing regions.
With much of the increased demand for the products of blue chip companies coming from overseas, economists and investors predict that demand from countries like China and Brazil will spur economic growth in the U.S.
Companies aren't hiring yet, but they're getting closer
All 29 technology companies in the S&P 500 index that have reported third-quarter earnings so far had higher sales compared with the same period a year ago. Much of the spending comes from companies upgrading their computer systems and software.
Doling out money on technology is a clue that companies are looking for ways to spend the billions of dollars sitting on their balance sheets. It's also typically one of the last moves they make before they start hiring new workers.
"Tech spending is one of the safest ways to deploy capital and improve operations without taking on the risk of hiring employees that you may have to lay off," said Thomas Villalta, a fund manager with Jones Villalta Funds. "It's one of the last transitional elements that you see when you emerge from a recession right before things click and unemployment starts to come down."
Banks aren't healthy yet
Financial companies are the only group in the S&P 500 that reported lower cumulative revenues this year versus the same period last year. Overall bank revenues have fallen by about $1 billion as companies look for new ways to make profits after lucrative practices like overdraft charges and credit card fees were curtailed by new regulations. Collectively, companies in the S&P index have seen their revenues jump by $54 billion over the same period.
The bank sector's good signs are being overshadowed by the bad. While banks like Wells Fargo & Co., Citigroup Inc. and JP Morgan Chase & Co. have announced that they are losing less money on bad mortgage and credit card loans than they were a year ago, the financial industry still can't quite shake the fallout from the real estate bubble. Bank of America Corp. has fallen 13 percent this quarter following an attempt by a group of institutional investors to force the bank to repurchase bad mortgages issued by one of its subsidiaries.
"Banks have tremendous profitability, but they are facing some sizable macro issues that are going to make it hard for the sector for a while," said UBS's Golub. Small businesses and consumers will most likely continue to have a hard time getting credit, prolonging the slow pace of economic growth.