A spate of positive earnings reports has raised hopes that the North American economy is finally pulling itself out of a prolonged period of sluggish growth, setting the stage for solid expansion in the balance of this year.
While the first-quarter earnings season is just getting into full swing, profit and sales growth is on display in almost all sectors in the United States. That's likely an indication of an economy finally getting back on its feet, analysts say.
"The underlying fundamentals remain quite favourable and to some extent that's what we have seen being reflected in the earnings reports," said Millan Mulraine, deputy head of U.S. research and strategy at TD Securities in New York.
Mr. Mulraine expects the momentum to last beyond 2014. "This good earnings performance could continue at least for the next year or so," he said.
So far, more than 40 per cent of the companies on the S&P 500 have reported results, and earnings growth is up 7.7 per cent year over year. The numbers have also beaten expectations – they are more than 6 per cent better than analysts estimated on aggregate, according to data collected by Bloomberg.
Sales growth has been more temperate, but it is also up by an average of 3.7 per cent over last year in the earnings season so far. But as economic conditions improve in North America and beyond, sales are poised to pick up in some industries.
At Caterpillar Inc., a 5-per-cent increase in first-quarter profit was attributed to improved sales in the global construction industry, which were stronger than either the company or analysts expected. The company raised its earnings outlook for 2014 from $5.85 (U.S.) per share to $6.10.
Global sales growth also bolstered technology giant Apple Inc., which reported better than expected earnings as iPhone sales hit new records in many of its emerging market regions.
In Canada the earning season is only just getting under way – only 15 of 242 companies on the S&P TSX index have reported – but the picture has also been generally positive so far. Results from Potash Corp. of Saskatchewan Inc. indicate stronger earnings growth may yet be ahead. Potash's net profit fell 39 per cent in the company's first quarter from the same period last year, but chief executive Bill Doyle said fertilizer demand is bouncing back, and stronger product prices are bolstering his outlook for the rest of the year.
"After an especially challenging environment in the second half of 2013, greater demand and stability emerged early in the year," Mr. Doyle said in a statement, adding that he sees "steady improvements" in the industry.
Stronger demand is the crucial factor that will make it crystal clear that the North American economy is rebounding, said Quincy Krosby, a market strategist with Prudential Financial Inc. And the biggest clue that demand is picking up comes in corporate revenue figures, she said, rather than profits which can be beefed up by cutting costs.
While results have been mixed so far, "the guidance that we are hearing from some of the bellwether companies is that they are beginning to see demand picking up," Ms. Krosby said. "That is what the market wants to hear."
She also noted that economic data are pointing toward a fundamental improvement in the economy. On Thursday, the figures for U.S. durable goods orders – an indication of long-term confidence in the economy by both consumers and businesses – rose 2.6 per cent in March, a better number than expected. And capacity utilization, another measure of the demand in the economy, has finally climbed significantly after years of poor performance, Ms. Krosby said.
Companies with exposure to the broad North American market say they feel a sense of optimism. "There is a lot of positive sentiment out in the marketplace, said Dean Davenport, president of the transport group at Standen's Ltd., a Calgary-based manufacturer and exporter of suspension equipment for automotive and farm markets. He sees the spate of mergers and acquisitions happening across the continent as a sign that "business has got money and is ready to invest."
While the North American economy may be picking up, globally the picture isn't quite so bright, TD's Mr. Mulraine said. Europe is improving, but still weak, he said, while "China is a bit wobbly."
Over all, "the U.S., and by extension Canada, will be the key driver for the resurgence in global growth," he said. "If you look at the horizon for the U.S. economy [in particular], the sky seems fairly clear."