We are about half way through the March quarter earnings season. So far, the verdict has been pretty strong across many sectors.
The financial sector showed the subprime issue was not as bad as once presumed. It's not the catastrophe the media was hyping it to be. Bank of America (NYSE: BAC) , Wells Fargo (NYSE: WFC), Washington Mutual (NYSE: WM) and Citigroup (NYSE: C) all reported in-line to better-than-expected results for the first quarter. They collectively took some charge-offs due to sub-prime, non-performing loans, but it did not derail the earnings flow or future earnings projections. Not one major U.S. financial institution took its second quarter or calendar year earnings guidance down.
The pharmaceutical world showed itself vibrant as well. Eli Lilly Corp (NYSE: LLY), Abbott Labs (NYSE: ABT) and Merck (NYSE: MRK) also reported in-line to better-than-expected first quarter results. The quality of earnings has been stronger than initially expected going into this earnings season. Far more companies have surprised on the top side than have missed expectations. The market has reacted with some strength on the buy side and many portfolio managers gearing up for what could be a good to excellent year.
The optimism heard around the Street now settles into concern over what the Federal Reserve will do about interest rates probably this summer or autumn. Is inflation enough under control to begin lowering rates? If the Fed does begin to lower rates, the financial services sector could have a banner year or two.
Dividend coverage of the major U.S. corporations is in excellent shape with normal coverage being about 50% of posted earnings. This is a very healthy sign that companies are not squeezing future-growth dollars to pay healthy dividends.
The weaker dollar has given some added oomph to many companies that derive a good portion of their revenues from outside the United States. Sales booked in local currencies, then traded back into dollars will help drive higher earnings for industrial giants like Caterpillar (NYSE: CAT) and the medical device industry, which is an American- dominated sector. Companies like St. Jude Medical (NYSE: STJ), Medtronic (NYSE: MDT) and Zimmer Holdings (NYSE: ZMH) generally derive anywhere from a quarter to a third of their base revenues from beyond the U.S. borders.
This week should prove to be as interesting as last week.
Stay tuned.
Georges Yared is the CIO of Yared Investment Research where he explores more growth stock ideas.
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