(Reuters) - A more robust U.S. economy could lift 2014 profits and boost corporate spending, giving some comfort to investors worried about bloated stock prices.
Faster economic growth should translate into better sales growth for the Standard & Poor's 500 index, and that has investors watching the coming fourth-quarter earnings reports to see if chief executives sound more optimistic - and if they plan on spending the gigantic pile of cash they are hoarding.
Fourth-quarter growth looks like it is going to be mediocre, but an unusually high level of profit warnings for the quarter could set the stage for companies to beat expectations that have been lowered dramatically.
For the S&P 500, fourth-quarter profit growth is expected to have increased 7.7 percent from a year ago, while revenue is expected to have risen just 0.4 percent, Thomson Reuters data showed.
But it is the outlook for the rest of the year that investors will watch closely. An improved pace of hiring - December's weak, weather-affected jobs report notwithstanding - along with increased domestic energy production, appreciating housing and asset prices and less fiscal drag from Washington could help push 2014's growth toward a more robust 3 percent.
If that occurs, sales growth will rise as well. Analysts at Mizuho Securities noted this week that rising GDP is a good predictor of profit growth.
"I think there's a good chance you'll see expectations generally rising as the year progresses," said Carmine Grigoli, chief investment strategist at Mizuho Securities in New York.
Expected revenue growth for 2014 is currently 3.8 percent, according to Thomson Reuters data, after an estimate of just 1.8 percent in 2013, but some see it better than that. Goldman Sachs, for example, expects 5.1 percent growth thanks to economic improvement.
The historical relationship between the economy and profit growth suggests the expected economic pick-up could add between 3 to 5 percentage points to S&P profit growth, Grigoli said in a research note this week.
Wall Street turns focus on U.S. bank earnings
January 13, 2014 by Leave a Comment