Businesses and the Markets hit the Pause Button – 10/26/12

We have been reviewing a large number of earnings reports this week and overall the results have been mixed.   The majority of companies that reported earnings have beat analyst expectations but the few that issued forward guidance seem to be less optimistic about future growth.  CEOs at many companies such as Caterpillar have consciously tried to tone down the analysts’ estimates in order to give themselves some room regarding the uncertainty that is forthcoming with the election and the looming “fiscal cliff”.  A host of companies reported numbers exceeding their own stated estimates but many have failed to reach the elevated earnings estimates forecasted by analysts.  As we look at overall revenue and business efficiency in the current earnings reports, it is clear that U.S. businesses are still in good shape. Many corporate balance sheets continue to improve, which has been a result of improved consumer spending along with continued cost cutting measures and reduced capital expenditures.

The key issue we have been discussing over the past few months is that business spending is still not providing a catalyst for growth because, as the article discusses below, many CEOs simply are not willing to commit to hiring people or making large capital outlays due to the uncertainty that Washington gridlock has created in regards to tax policy, spending, deficit reduction and regulation.  The good news is that the election will be over in a few weeks and Congress will feel the pressure thereafter to communicate a plan of action to address these issues.  The key issue is whether they play partisan politics as usual or will they get enough pressure from voters and the media to come together to pass new legislation.  In our opinion, political brinkmanship will continue in Washington after the impending elections, although to a lesser degree than what we have seen over the past few years, specifically with the recent debt ceiling debacle.   We do, however, anticipate an extension of the Bush tax cuts for at least a year as well as a reprieve on government spending cuts that threaten to stall the U.S. economy.