NEW YORK: Corporate America is turning a profit again, but only by spending less, not making more.

While recent bullish profit reports have fueled the stock market, a true economic revival will depend on consumers opening their wallets. So far, there’s little evidence of that.

Big names such as Caterpillar, IBM, Whirlpool, Pfizer, 3M and Lowe’s boosted profit forecasts for 2009 following a slew of second-quarter earning reports that blew past lackluster expectations. Yet the gains aren’t coming from sales.

Rather, companies are slashing everything from jobs to officer perks to boost the bottom line and please investors who have responded by pushing the major stock indexes to their highest levels in months.

None of this is surprising coming out of a recession. But the increase in the major stock indexes is raising questions about whether investors are getting ahead of themselves. Companies can only cut costs so much, and the profits and the stock surge aren’t likely to last without a sustained economic recovery that puts people in the mood to spend again.

“Cost saving is not going to be the source of future earnings,” said Fred Fraenkel, vice chairman of the Beacon Trust Company, an investment management firm. “The source is going to be revenue, and that can’t happen until the economy starts growing.”

Many companies are taking steps that could lead to even better year-over-year earnings growth in the third and fourth quarters. Last year, companies were unprepared for the plunge in consumer spending that followed the credit crisis and stock market collapse in September and October. Revenue fell sharply, but there wasn’t enough time to cut costs, so profits tumbled.

Now, months of cost reductions are paying off, and investors are eating it up. The Standard & Poor’s 500 stock index has shot up 44 percent since early March, while the Dow Jones industrials jumped above 9,000 Thursday for the first time since early January. On Friday, the Dow rose 23.95, or 0.3 percent, to 9,093.24.

source: Economic times

Tags: 3M, dow, IBM, nasdaq, Pfizer, Q2 results, recession, US markets, whirlpool

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