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Strong banks, energy companies stand out in early earnings

By Ben Berkowitz

(Reuters) - If the latest week of earnings season has told investors anything, it is that strong banks and energy companies are getting stronger, while weaker banks and technology companies are far from conquering the challenges they have faced in the last few years.

Any sense of optimism for 2013 has to be tempered by a steady decline in earnings growth forecasts, as well as a recent rise in companies making mass layoffs in attempts to get costs further under control.

With U.S. economic growth anemic and the uncertainties of the "fiscal cliff" still reverberating, companies that went into the fourth quarter of 2012 with some sense of momentum seem to have kept that up, while those that were on the wrong foot to begin with did not get much help.

"The takeaway is that earnings appear to be mimicking the economic recovery," said Tom Sowanick, co-president and chief investment officer at Omnivest Group LLC.

JPMorgan Chase & Co, the largest U.S. bank by assets, posted a 53 percent rise in fourth-quarter profits on growth in lending and a decline in bad loan costs. Goldman Sachs Group Inc, the largest U.S. investment bank, crushed Wall Street estimates on increasing client activity and smaller payouts to its bankers.

Meanwhile both industrial heavyweight General Electric Co and oilfield services leader Schlumberger Ltd handily beat expectations on still-booming demand for oil and gas equipment and services.

But the challenged got no relief.

Citigroup, the third-largest U.S. bank, badly missed estimates, striking such a cautious tone that analysts made no effort to hide their disappointment with the new management. Lender Capital One Financial Corp missed estimates after setting aside more money for credit card defaults.

Chipmaker Intel Corp, facing slack demand for personal computers, beat estimates because of a low tax rate and then forecast revenue and capital spending that unnerved investors. AT&T Corp warned of a $10 billion charge because its pension plan returns are weaker than forecast.

Market strategists like Doug Cote at ING Investment Management in New York say earnings season has been mixed at best, though there is always the potential for that to change with next week's crop of results.

MORE BAD NEWS COMING

All totaled, with 13 percent of the S&P 500 companies having reported fourth-quarter results as of Friday morning, 62 percent have beaten expectations, precisely in line with a typical quarter as computed since the mid-1990s.

But their profit growth has been lackluster at best. Blended fourth-quarter earnings growth (factoring in what has been reported and what is estimated to come) now stands at 2.5 percent, according to Thomson Reuters data. Less than four months ago, the expectation was that fourth-quarter earnings would grow almost 10 percent.

That may be why forward-looking earnings forecasts are getting so weak so quickly.

As of now, S&P 500 companies are expecting profits to growth 3.5 percent in the first quarter of this year, the data show. That figure was 4.3 percent at the start of January and 7.1 percent last October.

The slide, in other words, shows no sign of abating, and the trend holds equally true for second-quarter growth forecasts.

"I think it's a reflection of a very flat economy right now. I think that companies might have been a little more hopeful that the economy was going to be stronger than it is," said Bryant Evans, portfolio manager at Cozad Asset Management. "I think companies are pushing back better earnings to later in the year or early next year."

DEBT AND JOBS

Some companies blamed the ongoing weakness in Europe, which has moved past the worst of its debt crisis but is still struggling with the aftermath.

Johnson Controls, the largest U.S. auto part supplier, warned lower auto production in Europe would eat into results this quarter, sending shares lower even after it beat estimates for the last quarter.

Others, like Citigroup, warned they were taking a cautious posture because of the ongoing uncertainty over the next financial crisis facing the U.S. Congress: the country's ability to borrow more to pay its obligations.

"What we would like to see now is how the U.S. deals with the ongoing debt ceiling debate," Chief Financial Officer John Gerspach said on a conference call Thursday. The government is due to hit that ceiling as soon as mid-February, stirring fears of a debt default if it is not raised.

Some companies are reacting to the uncertainty by cutting jobs, hoping to save their way to stronger profits. Just this week, custody bank State Street Corp said it would cut 630 positions worldwide and Procter & Gamble cut 150 jobs in Europe. They join previous job-cutters like American Express, which is slashing 5,400 posts.

Even Cirque Du Soleil, the Canadian circus company known for its imaginative high-wire productions, said this week it would cut 400 jobs amid rising costs and currency pressure.

But the week's biggest loser might have been Jamie Dimon, the chief executive of JPMorgan. Despite the record profits his bank posted, Dimon was taken to task by the company's board for lax oversight, which led to huge trading losses last year.

The result? A bonus cut that cost Dimon more than $10 million.

(Additional reporting by Jennifer Ablan, Caroline Valetkevitch and Leah Schnurr in New York; Editing by Nick Zieminski)

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