Investors are beginning to focus on corporate profits to gauge how well companies are holding up amidst the slowing economy and ongoing credit problems, according to BlackRock.
Vice-chairman and chief investment officer for global equities Bob Doll says estimates for third-quarter earnings growth are around 5 per cent, which Doll says may be too high.
He says: “Interestingly, a closer look at the estimates shows that internationally oriented companies are trending around a 7 per cent growth rate while domestically oriented firms are closer to 1 per cent, a disparity that underscores why we have had a more favorable view toward multinationals.
“Full-year 2007 earnings estimates are now between 8 per cent and 9 per cent, which would require a 12 per cent growth rate for the fourth quarter, a number we believe is unrealistically high. In our opinion, all of these numbers are likely to continue to fall somewhat, which reflects slower rates of economic growth, but does not imply a profits recession.”
Doll says at present, investors’ primary concern remains the ongoing credit crunch, how it will impact the economy and what the Federal Reserve will do to limit its effects.
He says: “Fed Chairman Ben Bernanke spoke on Friday and gave assurances that the central bank will work to contain the impact of diminishing credit availability. These statements, combined with the fact that the U.S. economy has been growing at a below-trend pace for well over a year and that inflation remains within the Fed’s implied target range, leads us to believe that the Fed will cut the federal funds target rate at its next policy meeting on September 18.
“A rate cut should help in continuing to ease the liquidity squeeze, which should in turn help stocks to regain sounder footing. Nevertheless, we are not out of the woods yet, as we do not believe the effects of credit-related problems have been fully felt.
“We anticipate some more back-and-forth action in the markets, but maintain the view that we have expressed for the last couple of weeks – that is, we believe the low on August 16 represents the nadir for the current cycle and that stock prices will continue to move higher over the long-term. However, we do believe that the next stage of the bull market will be narrower than that which occurred during the 2002 through 2007 run. Likely winners, in our opinion, will include globally diversified companies, growth stocks and selected commodity- and industrial-oriented companies.”