WFM Whole Foods Market, Inc.

By Theo Francis and Kate Linebaugh 

This is the corporate landscape that will greet the next president: improving profits buoyed by rising employment and business spending -- yet tempered by the elusiveness of a more resilient recovery.

Earnings for the biggest U.S. companies began to rebound in the third quarter, a glimmer of growth after four straight quarters of contractions. But some executives are already expressing caution about the coming year.

Delphi Automotive PLC, the big car-parts maker, forecast flat auto sales in the new year, though it expects its own business to fare better. Whole Foods Markets Inc. projected negative to flat sales at grocery stores open at least a year, warning that food-pricing trends could worsen before they improve. Drugmaker AmerisourceBergen Corp. said its fiscal 2017 growth would lag behind that of recent years, in part due to pressure on generic-drug prices and uncertain prospects for brand-name price increases.

"The outlook for GDP, corporate profits and corporate investment is more favorable in 2017," said W. Edward Walter, chief executive of Host Hotels & Resorts Inc. "But the concept that it will be better next year has been offered frequently during this recovery and generally hasn't come to fruition."

With 85% of S&P 500 companies reporting results for the quarter, adjusted earnings -- excluding write-downs, restructurings and other items considered unusual -- are expected to rise 3.9% from last year's third quarter, according to Thomson Reuters. Revenues are expected to increase 2.6%.

Excluding the beleaguered energy sector, earnings are expected to rise 7.5%, with revenues up 4.5%, Thomson Reuters said. The figures reflect actual results for companies that have reported and analyst expectations for others.

Third-quarter improvements were led by technology, basic materials, financial and consumer discretionary companies, as well as utilities. Real estate, health care and financials showed the most improvement in revenues. The worst-performing sector remained energy, where profits are down 67% from third-quarter 2015 and revenue declined 15%.

"It's hard to paint this as anything but a good earnings season," said Jonathan Golub, chief U.S. equities strategist for RBC Capital Markets. "For this recovery, this has been pretty healthy compared to the environment we've been in for several years."

He said many 2017 estimates for earnings growth are probably too optimistic, but that doesn't mean pessimism is warranted.

Coffee chain Starbucks Corp. said strength in China helped overcome softer U.S. sales to send profits up 23% in the quarter. Health insurer Humana Inc. said gains in its Medicare and services businesses overcame weakness in Affordable Care Act operations. Strong trading activity boosted the latest results of the biggest U.S. banks, including Bank of America Corp. and J.P. Morgan Chase & Co.

The U.S. economy is clearly on the mend now, seven years after the recession. Last week, the Commerce Department said gross domestic product expanded at 2.9% in the third quarter, the strongest showing in two years. Spending on durable goods in the quarter remained strong and business spending rose for the second quarter in a row.

On Friday, the Labor Department said average hourly earnings rose 2.8% year-to-year in October, the fastest increase since 2009, with businesses adding jobs at a healthy clip. Consumer spending is projected to rise 3.6% this holiday season, according to the National Retail Federation, despite uncertainty caused by the presidential election.

Still, many executives fret that the better results may not carry over into 2017.

American Express Co. finance chief Jeffrey Campbell said big-company spending remains weak, with billings declining from a year ago, as companies cut costs in the face of slow revenue growth. Procter & Gamble Co. posted 3% organic sales growth in the latest quarter, but its finance chief Jon Moeller cautioned that it wasn't enough to boost the company's forecast for just a 2% increase in organic sales for the year that will end in June.

"We continue to face a relatively slow-growth, volatile world," Mr. Moeller said. "Progress will not come in a straight line."

Kimberly-Clark Corp. Chief Executive Thomas Falk echoed that sentiment, after the maker of Kleenex tissues and Huggies diapers lowered its financial forecasts for the rest of the year, in the face of currency fluctuations and slower sales in emerging economies.

"Every economic forecast, it seems like, that we look at lately, has a lower GDP growth number than the one before it," Mr. Falk said. "So we're not expecting a snap back."

Industrial companies also reported a tough climate. General Electric Co. and Honeywell International Inc. disappointed investors by cutting financial forecasts for the year. And United Technologies Corp. which reported strong third-quarter results, warned that profits will be flat next year, weighed down by costs of building new jet engines.

The recent year was "more difficult than we had expected, impacted by a significant and unprecedentedly long global industrial downturn that we expect to continue into 2017," said Craig Rossman, Emerson Electric Co.'s director of investor relations. The maker of InSinkErator garbage disposals and White-Rodgers thermostats projected a sales decline of between 1% and 3% in its current fiscal year.

For Host Hotels, record occupancies this year were accompanied by weaker business-travel spending in the third quarter. At the same time, high-end supply increased by about 2.5% this year in the company's top markets, and supply is expected to increase more than 3% next year -- meaning the company would need to see demand recover even more to give the firm pricing power.

"Companies are being very cautious regarding the fourth quarter and any guidance that is being offered for 2017," Jim Russell, portfolio manager at Bahl & Gaynor Investment Counsel in Cincinnati. "Global growth remains a challenging dynamic."

Write to Theo Francis at theo.francis@wsj.com and Kate Linebaugh at kate.linebaugh@wsj.com

(END) Dow Jones Newswires

November 07, 2016 02:48 ET (07:48 GMT)

Whole Foods Market, Inc. (NASDAQ:WFM)
Historical Stock Chart
From Mar 2024 to Apr 2024

Whole Foods Market, Inc. (NASDAQ:WFM)
Historical Stock Chart
From Apr 2023 to Apr 2024