(By Bearemy Glaser) First-quarter earning season kicked off this week with Alcoa (AA
) and Google (GOOG
) delivering more than respectable results. But will this trend play out for the rest of the season? If the recent past is any guide, the answer is yes. Despite the malaise elsewhere in the economy, corporate America is on a pretty impressive run. Deep cost cuts made during the recession, global footprints, and a rebound in demand in many industries have pushed profitability to very high levels.
There is no immediate sign that this trend is poised to dramatically turn around this quarter. We've had very few warnings from management teams that previous guidance was wildly optimistic, and the first quarter's macroeconomic indicators seem to point to a continued expansion. But even if the headline numbers remain robust, there could still be hints in earnings reports that the next few quarters may not be quite as rosy for investors. Here are five areas I'll be keeping a close eye on when examining the reports in the coming weeks.
Margins, Margins, Margins
The huge increase in profitability has been one of the biggest stories of the downturn. Firms took advantage of the recession to shed costs and emerge leaner. Underperforming divisions were unceremoniously shut down, unproductive workers let go, and other costs cut down. Saving cash wherever possible became paramount.
But these gains have now been realized. There just isn't that much more to cut. On the contrary, businesses are now finding that they have to invest more and bring more people on in order to keep growing. Fast-growing headcount might bode well for the employment numbers, but it isn't going to do much for profit margins. These workers may very well be necessary for sustainable growth, but they are going to depress margins to more normalized levels. How fast headcount and other overhead expenses are rising should indicate if margins are set to contract sooner rather than later.
One of the truisms of the beginning of the recovery was that high-end consumers were outperforming lower-end consumers. This dynamic wasn't particularly surprising. Higher-end consumers have a much lower unemployment rate, saw their stock portfolios recover faster than many expected, and were less likely to experience financial shocks such as foreclosure or bankruptcy. We heard from management team after management team that affluent consumers were coming back with a vengeance but that others were no where to be seen.
That dynamic has been changing lately as the jobs picture has improved, and all consumers have felt more confident and started making bigger-ticket purchases, like new cars.