Walmart (WMT) put an unofficial end to first-quarter earnings season with a splat Thursday, missing Wall Street’s profit estimate by a wide margin.
But that was more emblematic of what’s happening with the economy, not wider corporate results.
Indeed, a better-than-expected report from Cisco Systems (CSCO) summed up this earnings season almost perfectly: Profit beat Street estimates despite declining sales thanks to higher margins and cost cuts.
That’s the story of earning season — and it has been for a long time now.
Consumer Spending Weighs on WMT
True, fears that the exceptionally brutal winter weather would hurt everything from retailers to airlines came true. But the market did an adequate job of pricing the hit into corporate results. After all, aggregate earnings are exceeding expectations pretty much like they always do.
What WMT really tells us is that as bad as the weather was, it’s the almost-stalled pace of economic recovery that’s the real threat to its business — and many others. As much as WMT blamed the weather, that just doesn’t cut it as an excuse for sales weakness that goes back more than a year now.
The sad fact is that the brutal winter only magnified what’s ailing corporate results: Even after all these years into the recovery, consumer spending is feeble. CSCO, which relies on corporate spending, can get along OK in this economy. Companies that serve a mass market — WMT, McDonald’s (MCD), Target (TGT), Kohl’s (KSS), the dollar stores — can’t.
Taken as a whole, corporate earnings were better than forecast. First-quarter earnings from the S&P 500 are now poised to grow more than 2%, according to data from FactSet. As recently as March 31, profits were forecast to decline by more than 1%.
Additionally, the beat rate did what it always does. About 75% of companies exceeded Street earnings estimates. Revenue likewise did what we’ve come to expect, with 54% of companies reporting better-than-expected sales.
But in some ways, we’ve really just experienced two earnings seasons.
CSCO, dependent on corporate spending, delivered an upside surprise. WMT, a slave to consumer spending, posted a fifth consecutive quarter of declining same-store sales in the U.S.
At some point, companies can’t put off capital spending on technology. Consumers — especially lower-income folks — don’t have that luxury. Job creation is painfully slow and too often comprised of low-paid employment. Joblessness remains elevated, wages are stagnant and the housing market is still depressed.
Sure, horrible winter weather did its damage, but the problems run much deeper than that. Winter ended months ago, but retail sales and wider consumer spending are still hobbling growth and weighing on consumer stocks.
Once again, market watchers expect earnings to accelerate in the second half of the year. Fourth-quarter earnings alone are projected to rise more than 10%.
Well, we’ll see about that. It’s going to be tough to pull off without the McDonald’s and the Walmarts of the market participating.
A giant piston in the economic engine is misfiring. Consumers and consumer stocks need to get on track if those rosy second-half outlooks are going to come to pass.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.