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Early quarterly results from the United States' biggest companies have reinforced the notion that the U.S. economy, expected to be the engine of global growth in 2015, expanded at a lacklustre pace in the first three months of the year.
Subpar economic data and weak revenue growth from S&P 500 companies indicate that the extreme winter weather and other mitigating factors weighed on U.S. activity in the first quarter.
"This is a continuation of an environment we've been seeing for many quarters and years," said Craig Fehr, investment strategist at Edward Jones. "We haven't seen that tip-over point to where managers of corporations are really enthusiastic about the economic outlook and looking to deploy cash into new growth avenues."
Companies accounting for about 19 per cent of the S&P 500's market cap have reported first-quarter results so far. Bespoke Investment Group points out that only 42 per cent of companies have recorded revenues above analysts' estimates – the lowest beat rate since 2009.
Companies that missed on the top line haven't been punished by investors, however, suggesting that market participants had a better handle on the extent of sales softness than the sell side.
"Investors haven't seemed to care at all about the weakness in revenues," Bespoke writes. "The average stock that has reported this season has gained more than 1 per cent on its earnings reaction day, and even the companies that have missed revenues have averaged a one-day gain of 0.68 per cent on their earnings reaction days."
The Federal Reserve Bank of Atlanta's GDPNow forecasting model currently estimates that the United States' economy grew by just 0.1 per cent in the first quarter.
The sales weakness being seen in the corporate sector isn't solely a function of a U.S. economy that has yet to come out of hibernation, however. Multinational companies such as Johnson & Johnson, Philip Morris International Inc. and American Express Co. have all bemoaned the effect that the strong U.S. dollar has on revenues earned abroad.
"Oil and the U.S. dollar are disruptive, but the economic backdrop suggests corporations in the United States will perform adequately enough to hold up the stock market," Mr. Fehr said.
Heading into earnings season, earnings per share for the S&P 500 were expected to decline by about 3 per cent. Among firms that have provided quarterly updates thus far, earnings per share are up 1.4 per cent.
However, only a few energy companies, which are expected to show by far the most weakness in profits, have published results.
Nevertheless, with earnings growth largely surprising to the upside, fears of a "profit recession" may have been overblown.
The big U.S. banks have been one of the brightest spots early in this earnings season, with Goldman Sachs' portfolio strategy research team observing that the financials have contributed most of the upside surprises in profits thus far.
Last week, five major American financial institutions – Bank of America, JP Morgan Chase & Co., Wells Fargo & Co., Goldman Sachs Group Inc., and Citigroup Inc. – all recorded better-than-expected earnings per share for the first quarter.
Bank of America chief executive officer Brian Moynihan also shared a more rose-coloured view of U.S. activity in the first quarter that clashes with the disappointing economic data.
"We see continued encouraging signs in customer and client activity, with consumer spending increasing and utilization of credit by our commercial customers rising," he said in the bank's earnings release.
The strength in U.S. banking results portends another strong showing for their Canadian peers, whose investment banking divisions have benefited from a myriad of share issuances, primarily from energy companies.
However, Marianne Lake, the chief financial officer at JPMorgan Chase, cautioned that the bank was setting aside more money to deal with possible losses in energy, and was undergoing "redeterminations" of its exposure to this segment.
The big Canadian banks will also be reviewing their exposure to the space over this month and the next, and will be faced with a difficult balancing act. They will report their latest quarterly results at the end of May.
On the one hand, Canadian financials may not want to reduce much of the access to capital for energy companies, as this would raise the odds of credit impairments in the near future.
Conversely, the banks may be loath to leave too much money on the table for energy companies.
This would increase the scope for loan loss provisions to increase by a larger amount further down the road, as it is a struggle for many producers to turn a profit with energy prices at current levels.
The first-quarter results for Canadian energy companies are expected to be atrocious, raising the prospect of another round of capital budget reductions and layoffs to help weather the downturn in commodity prices.
Oilfield services titan Schlumberger Ltd. took action that raises fears about how long the negative effects of lower oil prices will filter through to the real economy.
The company slashed 11,000 jobs, citing the "severe fall in activity in North America."