US Profits Could Surge in 2014 If Economic Recovery Gathers Speed

An improving US labour market, rising housing and asset prices and lower financial drag from Washington can help push US growth toward a healthy 3% in 2014.

Faster growth in the world's leading economy should result in better sales growth for the Standard & Poor's 500 index.

As such, market players now await fourth-quarter earnings updates to see if corporate America is more optimistic and if companies will ramp-up spending this year.

Earlier in the week, analysts at Mizuho Securities said that rising GDP is a good predictor of profit growth.

The historical relationship between the economy and profit growth implies that the anticipated economic pick-up may add between three to five percentage points to S&P profit growth, Carmine Grigoli, chief investment strategist at Mizuho Securities in New York said in a note to clients.

Some of that optimism has been factored into profit forecasts, with anticipations of double-digit growth for the third and fourth quarters of 2014, Thomson Reuters data shows. The S&P 500 earnings growth for 2014 is forecast at 10.8% as against a 5.7% increase for 2013.

Dealmaking To Rise

Analysts also believe companies can disclose their willingness to boost capital expenditure and that Wall Street may witness higher M&A activity and share buybacks this year.

Goldman Sachs analysts have said that US firms, not including financials, are sitting on about $1.3tr in cash. They expect huge increases in deal activity and buybacks, alongside a 9% jump in capital expenditures in 2014 from a paltry 2% increase in 2013.

"The market increasingly will be looking at top line revenue growth, and it wants to see expansion in the top line," Quincy Krosby, market strategist for Prudential Financial told Reuters.

"I think there's a good chance you'll see expectations generally rising as the year progresses," Grigoli said.

"We would expect [companies] would start to loosen their purse strings," said Karyn Cavanaugh, market strategist at ING US Investment Management. "We've had the fiscal cliff, the sequestration and the Washington shutdown, and the world hasn't fallen apart," she told the news agency.

Scotiabank said in a note to clients: "Earnings, the need for a renewed bill to fund the US government, Fed speak ahead of the next FOMC meeting, and a handful of key releases will put US markets ahead of others by way of influences upon the global market tone. A relatively quiet calendar elsewhere in the world will amplify the sensitivity to US centric factors."

"Much of the earnings risk will be concentrated upon financials as is usual near the beginning of each round of quarterly reports."

"Thirty firms in total report this week starting on 14 January. Firms like JPMorgan, Wells Fargo, BoA, Black Rock, Goldman Sachs, Citigroup, Amex, Capital One, BB&T, BoNY, and Morgan Stanley are at the top of the list, but a few important nonfinancials like GE and Intel will also grab attention. Of the 23 firms that have reported thus far on the S&P500, 65% have beaten analysts' earnings expectations mostly because of technology and consumer goods firms," the Canadian bank added.

Companies in the US have logged lower profit margins since 2011, Thomson Reuters data shows. Net margins were at 9.73% in the July-September third quarter of 2013, as against 10.61% in the third quarter of 2011.