The Norman Transcript

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October 28, 2012

Halftime report: Is fear of a weak 3Q overblown?

WASHINGTON — It’s halftime for the season of corporate earnings reports, and investors are in desperate need of a locker-room pep talk.

Before Alcoa reported its third-quarter results Oct. 9, marking the unofficial start of earnings season, financial analysts were predicting that profit and revenue for companies in the Standard & Poor’s 500 would be lower than the year before.

That would have been the first decline by either measure since the third quarter of 2009, just after the Great Recession ended.

But a funny thing happened on the way to the pity party: Some of the biggest and most important U.S. companies started reporting revenue growth and raising their guidance.

The quarter was no blockbuster, to be sure, but by midweek analysts were reassessing their grim predictions. Halfway through earnings season, both winning streaks — profit and revenue — are on track to survive another quarter.

There are still plenty of reasons to worry about corporate America.

Sales are hurting because of weaker demand from Europe, which faces a recession, and China, where economic growth has slowed. A stronger dollar means sales overseas translate into lower revenue on the books back in the United States.

Above all, analysts worry about weaker revenue. Net income grew for 11 straight quarters partly because so many companies cut costs, borrowed money more cheaply and employed other short-term strategies to boost their profit margins.

In the fourth quarter of 2010, for example, net income for the S&P 500 leapt 37 percent, but revenue increased only 10 percent, according to S&P Capital IQ, a research firm.

That gap can’t survive, analysts say, and revenue growth is starting to weaken. Companies will need to beef up sales to keep increasing their earnings, and that takes stronger customer demand.

And yet: The winning streak appears likely to continue.

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