NEW YORK – Investors to Corporate America: Meh.
U.S. companies are reporting strong profits for the fourth quarter of last year. But most are failing to impress investors who were hoping for even better numbers or rosier outlooks, and are too worried about larger global macroeconomic forces to do much buying.
"Earnings season is going quite well," says Christine Short, a senior manager at the research firm S&P Capital IQ. "But what we're seeing in earnings season is not what we are seeing in the market."
With results in from half of the companies in the S&P 500 index, fourth-quarter earnings are up a respectable 7.3 percent, making it the best quarter of last year, according to S&P Capital IQ. Of the 250 companies that have reported results, 172 companies have beaten earnings expectations and 51 have fallen short, a better ratio than average. Company revenues have also come in better than in the past relative to expectations.
It's just not enough for investors. The S&P 500 fell 41 points Monday, or 2.3 percent, and is down 5.2 percent since earnings season kicked off on January 9.
Stocks rose almost unchecked in 2013, posting their highest gains since 1997. Because stock prices rose so high, that has investors on alert for any bad news. The slowdown of stimulus from the Federal Reserve, currency problems in emerging markets such as Argentina and Turkey and slowing growth in China have served to ratchet up the worry.
Stocks fell Monday after a manufacturing survey showed weaker factory activity growth than expected and the Commerce Department reported that construction spending rose only modestly in December, slowing from more robust gains a month earlier.
"The market has the jitters," says Quincy Krosby, market strategist at Fidelity Investments.
So, when companies share financial news that is less than terrific - revenue or earnings that are a little weak, or outlooks that are cautious or even slightly negative - shares get hammered.
Randy Frederick, an investment strategist at Charles Schwab, points out that the results for the last quarter so far are strikingly similar to those posted over the previous few quarters, but stocks are going down instead of up.
"The quarter is the same, but the market reaction to it is different this time," he says.
Amazon posted higher revenue and profit for the fourth quarter after the market closed on Thursday, but it failed to meet analysts' expectations. It predicted revenue of $18.2 billion to $19.9 billion for the first quarter - not strong enough for analysts who all had forecast $19 billion or higher, according to FactSet. Shares are down 14 percent since Friday morning.
Apple beat Wall Street expectations for profit and revenue, but iPhone sales fell 3 million short of expectations - despite hitting a record 51 million. Also, the company cautioned that its revenue growth would soon slow. That led to an 8 percent drop in Apple's stock, reducing the value of the company by $40 billion.
Investors seemed to latch on to even minor blemishes. General Electric's profit margin from industrial operations by improved by 0.66 percent, barely missing its target of 0.7 percent. Still, that was enough to send shares down 11 percent since it reported results January 17.
"The market is punishing those that don't deliver," says Krosby.
On the other hand, companies that have posted strong results and outlooks for 2014 have been bid up sharply, despite the overall market slide.
"The companies that come out with strong data and margins that are intact are getting rewarded," Krosby says.
Google posted a 17 percent gain in revenue and profit Thursday, and shares remained up by 2 percent despite the broader market decline. Caterpillar's earnings per share beat analyst expectations by 21 percent, and the company raised expectations for profit in 2014 last Monday. Shares responded by rising 7 percent since then.
The outlook for corporate profits and revenue for 2014 is strong, according to S&P Capital IQ. Revenue is expected to rise 4.5 percent for the year, compared to just 1.9 percent in 2013, and earnings are expected to rise 8.5 percent for the year, better than 2013's 5.8 percent gain.
But investors are concerned that this isn't quite enough to justify stocks' high prices at a time when the Federal Reserve decision to slow its stimulus program is making cash a little less easy to come by. Less cash in the system means less cash for investors to buy stocks with.
"The more you drain the stimulus, the better results you need to see," Krosby says.
The slowing stimulus is crushing stocks in developing nations, because investors fear a smaller supply of cash in the world will drain money from their economies. At the same time the Chinese economy appears to be slowing and prices for European goods are growing more slowly than the European Central Bank had hoped, raising fears of deflation there.
"All these concerns are translated into people paring back on any type of risk," says Robert Pavlick, chief market strategist at the investment firm Baynan Partners.
Jonathan Fahey can be reached at http://twitter.com/JonathanFahey