Since bottoming in the fourth quarter of 2008, corporate earnings have been on a tear, with double-digit percentage profit gains in the past six quarters underpinned by cost cutting and modest revenue expansion.
As first-quarter results come out during the next several weeks, the profit expansion is continuing at that same fast pace. First-quarter profits are expected to rise 40%. But the driving force now is sales, fueled by a projected double-digit increase in average revenue.
Alcoa Inc.’s 22% increase in first-quarter revenue set a strong opening for what is expected to be a 10.8% gain for the members of the Standard & Poor’s 500-Stock index. It was the aluminum maker’s best sales performance since the third quarter of 2008.
Big banks including J.P. Morgan Chase & Co., which reports Wednesday, likely benefited in the quarter from strong mergers and acquisitions. While big deals are good for Wall Street banks, signs of loan growth—which has gained little traction during the recovery—are more important to the broader economy.
Revenue expansion is crucial to keeping profits growing. Higher energy and raw materials costs have begun to chip away at corporate operating margins. Margins have been near record levels in recent quarters, but with gasoline expected to surpass $4 a gallon soon, there are concerns the hit to consumer spending and rising costs at trucking, airlines and other industries could trigger new pressure on the nascent jobs recovery.
Corporate profit margins appear to have hit a near-term peak, and S&P’s latest gauge shows first-quarter operating margin for members of the S&P 500 to slip to 8.43% from 8.68% in last year’s fourth quarter. Margins peaked in 2010’s third-quarter at 8.95%.
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