(Bloomberg Opinion) -- Earnings season kicks into high gear this week, and expectations are low. Profits for the second quarter are expected to be little changed to lower from a year earlier amid the escalating trade wars and a slowing economy. Sentiment expressed in public communications by the biggest U.S. companies slumped in June to the lowest level in at least a year, according to Goldman Sachs. That sounds like a perfect time to be a contrarian.
With the exception of Elon Musk and a few others, CEOs tend to be fairly reserved when discussing the outlook for earnings. They certainly want to exude confidence, but they also don’t want to set unrealistic expectations. That way they can be seen as heroes when results exceed estimates in a game known as “underpromise and overdeliver.”
So when it comes to insight into performance, it pays to look at what CEOs are truly doing rather than what they are saying. And in that regards, Jim Paulsen believes U.S. businesses are in better shape than company executives are letting on judging by the level of dividend payments, which increased 7.5% on a per-share basis from Sept. 30 through Friday, Bloomberg News reported, even though profit rose only 1.1%. International Business Machines Corp., Molson Coors Brewing Co. and Stanley Black & Decker Inc. are among the members of the S&P 500 that have incraesed their dividends in recent weeks.
Who is Jim Paulsen? Following the stomach-churning performance of stocks in the last quarter of 2018, during which the S&P 500 Index tumbled as much as 19.3%, few strategists were willing to declare that the bottom had been set. One who did was Leuthold Group’s Paulsen. In a research note dated Jan. 3, when the S&P 500 closed at 2,447.89, he wrote that with a little investor optimism, a dovish Federal Reserve and an economy that avoids falling into recession, the S&P 500 could soar to 3,000 for the first time.
The S&P 500 did top 3,000 this month, much sooner than most anyone on Wall Street expected. So what does Paulsen think now? He says investors are likely to be pleasantly surprised by what they hear from corporate executives in coming weeks, helping to support equities. He bases that on the fact that companies continue to raise dividend payments despite recent listless profitability.
Paulsen points out how the current period contrasts with the early 2000s and early 2008, when dividend increases came to a halt as profit growth stalled. More important, when S&P 500 earnings declined during 2015-16, companies continued to raise dividends and earnings ultimately began to advance anew. “Although corporate CEOs are expressing anxieties, they are ‘acting’ confidently, suggesting they continue to expect satisfying earnings results in the coming year,” Paulsen says.
Are company executives in denial? Outside of metrics tracking the consumer, there are no shortage of indicators showing that the escalating trade wars are acting as a drag on the economy. The Federal Reserve Bank of Atlanta’s GDPNow index, which attempts to gauge economic growth in real time, is tracking at a weak 1.61% rate; it was above 4% this time last year.
And in a Friday report, Goldman economists outlined findings drawn from 4,000 earnings and conference call transcripts by S&P 500 companies over a year that showed a “sharp increase in negative mentions” of growth. International relations, including references to foreign countries and trade, were less prominent than other topics, but negative words had surged “and appeared responsive to the slowdown in global growth and continued escalation of trade tensions.”
There’s no reason to suspect the trend won’t continue this earnings season. But with profits forecast to drop 2.7% from a year earlier for members of the S&P 500, that’s to be expected. Otherwise, executives would open themselves up to criticism that they are out of touch with reality. That’s why it’s more important to watch what CEOs do this earnings season, rather than what they say.
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Robert Burgess is an editor for Bloomberg Opinion. He is the former global executive editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.
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