Blue-chips raise recession fears

Wall Street analysts are lowering growth expectations for leading blue-chips to their lowest level since late 2008 and early 2009.

Story highlights

  • Estimates of revenue growth for the largest US companies are being scaled back
  • It signals a mounting risk that the world's largest economy may enter recession

Estimates of revenue growth for the largest US companies are being scaled back sharply by Wall Street analysts, signalling a mounting risk that the world's largest economy may enter recession later this year.

The reduction in growth expectations for leading blue-chips to their lowest level since late 2008 and early 2009 comes as investors have been piling into stocks in dividend-paying large companies that are seen as havens against the backdrop of the eurozone crisis and a weakening US outlook.

Analysts expect average revenue growth will rise at an annual rate of 1 to 1.5 per cent during the third quarter for the 30 large companies in the Dow Jones Industrial Average. That's below the current inflation rate and down from a forecast of 4 to 6 per cent at the start of the year.

"We are fast approaching levels where these estimates are unambiguously pointing to the risk of a US, global recession later in 2012 and into 2013," said Nicholas Colas, chief market strategist at ConvergEx Group.

The slide in revenue forecasts has accelerated in recent weeks as companies have released their second-quarter earnings. Lower revenues will increase the pressure on companies to cut costs by laying off workers, which in turn threatens to weaken the broad economy and corporate profits in the coming months.

For now, analysts are still forecasting revenues will rise 3.9 per cent year on year during the fourth quarter. Mr Colas said such a forecast relies on a weaker dollar boosting the companies reliant on large foreign sales.

Expectations that the Federal Reserve will launch a third round of quantitative easing by September has helped propel stocks higher since they bottomed in June, with the rally being led by large companies that have cash-laden balance sheets and pay dividends.

Last week, seven Dow blue-chips hit 52-week highs while the S&P 500 Aristocrats index, consisting of 30 companies that have consistently raised dividends for at least 25 years, sits at a record high and has risen more than 7 per cent since the start of June.

"In the current environment of ultra-low fixed-income yields and increased volatility in equity markets, dividend paying companies look very attractive," said Linda Bakhshian, portfolio manager at Federated Investors.

With revenues sliding, it leaves investors vulnerable to sharp price declines for such companies. But some argue that companies holding large amounts of cash will retain favour with investors.

"Even as the pace of revenue growth slows, many of these companies still have tremendously good balance sheets and a lot of cash at hand," said Oliver Pursche, a portfolio manager at Gary Goldberg Financial Services. "Revenues have not been as strong as we would like to see them. But they haven't been horrible."

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