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Bank profits soar in second quarter; tech lags

  • Article by: STEVE ROTHWELL
  • AP Markets Writer
  • July 26, 2013 - 3:55 PM

NEW YORK — Just over half of the companies in the Standard & Poor's 500 index have reported earnings for the second quarter, and some are faring better than others. Here are some of the things we've learned so far.

Banks and other financial companies have been the standouts. The materials sector, which includes miners and chemical companies, have fared the worst. Earnings are also contracting in the technology industry. Some older tech companies are reporting lower profits as they struggle to adapt while consumers embrace smartphones and other mobile devices.

Overall, earnings growth is projected to slow for a third straight quarter. Analysts forecast that companies in the Standard & Poor's 500 index will report earnings growth of 4.5 percent for the period, according to S&P Capital IQ. That's a drop from 5.2 percent in the first three months of the year.

It's not all bad news.

Earnings at U.S. companies are expected to grow faster in the second half of the year as the economy strengthens. Rising consumer confidence, boosted by climbing home prices and an improving job market, should combine to drive the economy to stronger growth, helping companies earn more. The economy should also benefit after the impact starts to fade from government spending cuts and higher social security taxes put in place at the beginning of the year.

By the fourth quarter of this year, company profits are expected to leap 11.2 percent from the same period a year earlier. That would be the fastest pace since the third quarter of 2011. For now, investors have to be content with modest growth.

BANKS: GETTING BETTER

U.S. banks reported surging profits after setting aside less money for bad loans. Major banks including Citigroup and JPMorgan Chase also profited from a boom in investment banking as recovering financial markets resulted in big increases in fees for underwriting stock and bond offerings. Rising interest rates also helped banks earn more from lending money.

The outlook for banks isn't as encouraging, however. There are signs that the boom in mortgage refinancing is starting to peter out. On the positive side, there weren't any nasty surprises of the kind banks have regularly handed investors in the years following the financial crisis. There was no mention of massive trading losses like JPMorgan's $6 billion "London whale" debacle last year, or settlements for mortgage-related lawsuits.

Banks are forecast to post earnings growth of 24 percent in the second quarter, the best of any industry group in the S&P 500. Of the 39 financial companies that have posted earnings, 74 percent have beaten analysts' expectations for earnings. That's better than the 66 percent average for S&P 500 companies. In fact, if you strip out banks, overall earnings are forecast to rise only 0.5 percent, according to S&P Capital IQ.

"I suspect that over the next few quarters, to the extent that interest rates continue to rise, you may well continue to see financials outperform the broader market," said Joseph Tanious, a global market strategist at JPMorgan Funds.

The earnings have helped financial companies post the second-best returns in the S&P 500 this month. They're up 6.1 percent in July, compared with a 5.3 percent gain for the broader index. Financial stocks have gained 25.7 percent this year.

'OLD' TECH STRUGGLES

Technology companies were meant be among the biggest beneficiaries of an improving economy. It hasn't played out that way. Some of the biggest names in the sector are struggling to adapt to new technologies and how consumers use them.

Microsoft fell 11.4 percent July 19, the most in more than four years, after the company wrote off nearly $1 billion from its new Surface tablet business and said that a poor reception for its Windows 8 operating system crimped revenue.

Intel, which is wedded to the PC market even as consumers switch to mobile devices, slumped after the company predicted flat sales.

Even Google faltered. Its results suggest that the company is having trouble navigating the transition from traditional desktop and laptop computers to smartphones and tablets.

Earnings are expected to contract 5 percent for tech companies in the second quarter.

"Technology companies are where we've seen some of the biggest disappointments in terms of earnings," said Kate Warne, an investment strategist at Edward Jones. "The older technology companies have been a bit slow to move to newer areas."

GLIMMER OF LIFE IN EUROPE?

The slump in Europe may not be over, but there are some signs of hope, judging from comments made by executives at industrial companies.

That's good because many U.S. companies rely heavily on sales to Europe. Deutsche Bank's chief U.S. equity strategist, David Bianco, estimates that 17 percent of the profits at S&P 500 companies come from the region.

General Electric's CEO, Jeff Immelt, told analysts on a conference call that Europe has stabilized. GE's orders increased 2 percent in the period after falling 17 percent in the first three months of the year.

Honeywell, another industrial conglomerate, said that while conditions remained tough, there were hopeful signs. The company's CEO, David Cote, said that while it was difficult to envisage a "big bounce," demand in Europe was "encouraging." Its turbocharger business did better, as did its sensor and controls business.

A turnaround in Europe would be welcome news for industrial companies. The sector is on track to report flat earnings for the April-through-June period.

CLEARING A LOW BAR

While most companies' earnings have been beating analysts' expectations, their performance on revenue was less impressive. Second-quarter revenue for S&P 500 companies is forecast to drop 0.6 percent, the first decline since the third quarter of 2009.

That suggests companies are increasing their profits by cutting costs, rather than boosting their sales. That's a trend that can only run so far.

"There's not a whole lot of room left in terms of improving profit margins," said Paul Mangus, head of equity research and strategy at Wells Fargo Wealth Management. "We need to see more top-line growth if you're going to see more robust earnings."

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