(Bloomberg News) Profits at American companies are poised to be one of the few bright spots in the U.S., helping to steady the faltering recovery.
Earnings will climb an average 10 percent a year through 2013, more than three times quicker than the economy, after what has already been the fastest rebound since the late 1940s, JPMorgan Chase & Co. projects. In mounting signs of confidence, Macy's Inc. has raised its annual profit forecast, Intel Corp. and Target Corp. increased dividends and DuPont Co. plans to invest more than $500 million to boost production.
Surging overseas sales, improving U.S. demand and the Federal Reserve's pledge to keep interest rates close to zero for an extended period bode well for earnings, said Robert Mellman, an economist at JPMorgan who has tracked corporate profits since 1985 and published a special report May 20 on the subject. Widening margins will give businesses the means and incentive to invest and hire, paving the way for accelerating growth in the world's largest economy, he predicted.
"Corporate profits have plenty of room to run," as "returns on investing and expanding are high," Mellman said in a June 10 interview from New York. "This makes companies want to grow the business. As profitability remains strong, they'll increase hiring."
The recent spate of weak economic data, capped by news that payrolls grew in May at the slowest pace in eight months, has sparked concern about the expansion's sustainability. Even so, JPMorgan projects growth will pick up in the second half as higher energy costs and supply-chain disruptions subside. The economy will return to a 3 percent growth rate in the third and fourth quarters, with profit gains accelerating to 10 percent, Mellman said.
10 Percent Rise
The earnings trend likely will mean a boost for the stock market, predicts John Carey, a Boston-based money manager at Pioneer Investments, which oversees about $250 billion. It's "reasonable" to expect the Standard & Poor's 500 Index will be up 10 percent this year from the end of 2010, he said, compared with about 1 percent as of June 10.
Investors in financial companies such as banks may see some "nice gains," and technology stocks including semiconductors are a good bet, Carey said. Mergers, acquisitions and share- repurchase activity also may pick up, while dividend increases will become more widespread and frequent as companies armed with stronger balance sheets put their cash to work.
"There's certainly a lot of gunpowder," Carey said.