Monday, April 30, 2012

Better than expected first quarter earnings reports offset the less than inspiring economic reports in recent days and helped stocks get close to previous highs. But the surprisingly positive tone of this earnings season is unlikely to remain ‘newsy’ enough going forward since the reporting cycle is already beyond the halfway point. This will likely shift the spotlight back to the economy, with the focus squarely on the labor market this week with the April jobs report coming out on Friday. This morning’s positive Personal Income & Outlays report is welcome, but the essence of this reading was already captured in the consumer spending component of the first quarter GDP report.

This monthly report showed that both Personal Income and spending grew at better than expected rates in March. Consumer spending increased at a 0.3% pace, compared to February’s upwardly revised 0.9% growth pace (originally up 0.8%). The Personal Income component of today’s report showed a 0.4% increase, up from February’s upwardly revised 0.3% increase (originally at up 0.2%). The March Personal income gain is particularly welcome given the recent run of fairly modest income readings. With income outpacing spending this month, the personal savings rate inched up to 3.8% from February’s 3.7% rate.

The most reassuring part of Friday’s advance look at the first quarter GDP was the consumer spending component, which increased at a better than expected 2.9% rate, compared to the preceding quarter’s 2.1% pace. This morning’s strong Personal Income & Outlays reading not only reconfirms that report, but improves the odds of further positive revisions in the GDP’s subsequent iterations.

The focus this week no doubt will be on the labor market, but we are still in the midst of the first quarter 2012 reporting season. We are past the mid-point of the reporting cycle with about 60% of the results already in. But this week brings reports from another 124 S&P 500 companies, which means that by end of this week we will seen first quarter results from roughly 84% of the companies in the S&P 500.

The earnings miss this morning from Humana ( HUM - Analyst Report ) notwithstanding, this has overall been a very good earnings season. The roughly 60% of the companies that have already reported, total earnings growth is tracking 9.4%, with roughly 71% coming out with positive earnings surprises. Most of the growth is coming through revenue gains, with aggregate margins essentially flat from the year-earlier level. This is a far cry from pre-season expectations, when aggregate earnings were expected to be down modestly from the year-earlier period. The Humana earnings miss does not appear that surprising when we realize that fellow health insurers Aetna ( AET - Analyst Report ) and Coventry healthcare ( ) also posted negative earnings surprises last week.

Sheraz Mian
Director of Research