Profits falling for Corporate America

Associated Press

NEW YORK

Corporate America has a profit problem. U.S company earnings are falling for the first time since 2009, when the economy was still reeling from the Great Recession.

The main culprit is the plunging price of oil, which has decimated earnings at big energy companies such as Exxon Mobil and Chevron. Mining companies also have taken a beating because of tumbling prices for gold, silver and copper.

Earnings at energy companies dropped a staggering 59 percent in the third quarter, enough to drag overall profits for companies in the Standard & Poor’s 500 index down 1.5 percent, according to estimates by S&P Capital IQ. That marks the first quarterly decline in six years. Without the drag of energy companies, overall earnings would be up 6.2 percent.

To be sure, earnings are still high by historical standards, and the U.S. economy is continuing to slowly improve. But with stock indexes near record highs, the weak earnings make many stocks vulnerable to declines. And energy companies aren’t the only ones having trouble earning money, as several thorny problems continue to nettle Corporate America.

The strong dollar makes it much harder for U.S. companies to compete in overseas markets; slowing growth in other countries, especially China, means weaker exports; and in the past week, several big retailers such as Macy’s and Best Buy have reported weak sales and poor outlooks for the holiday shopping season.

This has contributed to a trend that concerns some even more than feeble profits: Revenue for S&P 500 companies has shrunk in all three quarters so far this year.

In the past, U.S. companies have been able to push their earnings per share higher even with lower revenue by slashing costs, cutting jobs and spending huge amounts of money, often borrowed at cheap rates, to buy back their own stock. It stopped working this quarter.

“We’re at the point where we can’t get any more blood out of the stone,” said Kristina Hooper, U.S. investment strategist for Allianz Global Investors.

As a result, investors are going to need to be a lot more selective about what stocks they buy and not just assume that a recovering economy will mean equally good results for all good U.S. companies.