Tags: Strong | Earnings | Growth | Jobs

Strong Earnings Growth Doesn't Buy Jobs Just Yet

Monday, 26 Apr 2010 10:31 AM


Companies are pulling in big profits but that doesn't mean they'll be quick to hire.

Investors have been buying stocks for nearly 14 months on the assumption that a rebounding economy will bring higher earnings and lower unemployment.

Companies' first-quarter profit reports have been upbeat, and the government released promising numbers showing employers added 162,000 jobs in March. So, many investors may now be looking for stronger job growth.

Not so fast.

The hiring will come, but only gradually, analysts say. The concern in the market is that investors may be so impressed by earnings they'll get overconfident about employment. And that could mean disappointment if the Labor Department's April jobs report two weeks from now falls short of expectations. Major stock indexes are already bouncing along 18-month highs and overdue for a retreat, most analysts say.

Unemployment sits at 9.7 percent, compared with 10.1 percent in October. Investors believe a sustained increase in job growth will be the ultimate proof that the economy is healing.

Steven Goldman, chief market strategist at Weeden & Co. in Greenwich, Conn., said better earnings will indeed help nudge companies toward adding workers. He's predicting unemployment will fall, but by the end of the year.

"They're going to be a bit more relaxed going forward and I think they will loosen up their budgets to do that hiring," Goldman said. "It's following the normal stages of an economic rebound."

The earnings reports for the January-March quarter that are now arriving are giving investors some hope. Of the more than 100 Standard & Poor's 500 companies to report earnings so far, more than 80 percent have posted profits that beat analysts' estimates by at least 2 percent.

Analysts polled by Thomson Reuters now forecast that the companies that make up the S&P 500 will earn about $83 per share in 2010. At the start of the year, analysts were calling for earnings to rise to about $77.50 in 2010 from about $62 in 2009.

Chipmaker Intel Corp., the bank JPMorgan Chase and the railroad CSX all posted large profit increases from the same quarter a year earlier when the economy was still tumbling. Each said they are hiring or plan to do so. Intel wants to bring in 1,000 workers, while JPMorgan said it will add 9,000 employees.

But Anthony Chan, chief economist at J.P. Morgan Private Wealth Management in New York, said some employers don't want to add to their expenses by hiring.

"Firms have now sort of gotten used to a greater level of efficiency that they essentially generated during the recession," Chan said. "I think they'll still show some caution."

Phil Orlando, chief equity market strategist at Federated Investors in New York, predicts that the stock market will keep climbing on stronger profits even if the job market remains weak. He expects the nation's unemployment rate will tick higher this year to around 10 percent when the discouraged workers who aren't counted in the government's unemployment survey begin looking for work again.

Orlando forecasts that unemployment will come down by only about 1 percent a year in the coming years. But he also says the stock market could reach record levels by the end of next year.

"We're probably going to have a record high in the S&P with the rate of unemployment being no lower than 8 percent," he said.

© Copyright 2015 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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