U.S. corporations ended 2011 with the slowest profit growth intwo years as the mending economy that lifted Macy's Inc. was met bya European slump that vexed companies more tied to global sales,such as Cisco Systems Inc.

Standard & Poor's 500 Index companies may have earned $24.74a share in the fourth quarter, according to analysts' estimatescompiled by Bloomberg as of Jan. 6. The projected 6 percent gain isthe smallest against a year-earlier quarter since September 2009,just after the U.S. recovery began.

“Slowing global growth, some impairment of export activity toEurope and perhaps even the rise of the dollar collectively havebegun to sort of work against the multinational story,” said MarkLuschini, chief investment strategist at Philadelphia- based JanneyMontgomery Scott LLC, which manages $54 billion. While growth isstill “subpar,” he said he intends to invest more in the U.S. toavoid higher international risk.

The U.S. jobless rate fell in the final four months of 2011 andeconomic growth may rise to 2.1 percent in 2012, the averageestimate of economists in a Bloomberg survey. The European Unionmay contract by 0.2 percent, its second slowdown in four years, andChina's 8.5 percent growth would be the lowest in 11 years.

“I'm growing more optimistic that the economic activity in theU.S. is firming to the point that it's durable,” he said.

Overseas demand that propelled U.S. profits a year ago may waneas European nations trim budgets to deal with their debt crisis anda slowdown in China hurts commodity-tied developing nations, saidChad Morganlander, a Stifel Nicolaus & Co. money manager inFlorham Park, New Jersey.

Alcoa Inc., the largest U.S. aluminum producer, plans to releaseresults today after markets close, the first company in the DowJones Industrial Average to report. Investors will be watching tosee how the difference in economic trends in the U.S., Europe andAsia affect companies' earnings.

“There's going to be a big dichotomy between U.S. exporters anddomestic-focused U.S. companies,” said Jacques Porta, a fundmanager at Ofi Patrimoine in Paris, who helps oversee about $400million.

U.S. payrolls rose 200,000 in December, double November's gain.Average jobless claims for the four weeks ended Dec. 31 dropped tothe lowest since June 2008. A measure of consumer confidence ended2011 at a five-month high. And manufacturers reported growth inDecember was the fastest pace in six months.

Global Economy

In Europe, where austerity measures are tightening andunemployment remains at a 13-year high, data show households andbusinesses are more reluctant to spend. In China, residentialproperty values are falling and the ruling Communist Party isshifting focus to supporting growth rather than damping inflationas Europe's debt crisis threatens to curb exports.

“A pronounced deceleration of global economic growth will bleedinto earnings” for some U.S. companies, said Morganlander, whosefirm oversees more than $107 billion in client assets. He predictsS&P profit will drop in 2012, the first annual decline since2008.

Philip Orlando, chief equity strategist at Federated InvestorsInc. in New York, which oversees $355 billion, is less pessimistic,saying the stronger U.S. economy probably boosted S&P 500company earnings by about 10 percent for the fourth quarter, andshould support 6 percent growth for 2012.

“It's not going to be a phenomenal quarter, but a nice solidquarter,” said Orlando.

U.S. growth will help boost profits for companies that getalmost all of their revenue from home, such as retailers, saidOrlando. Macy's had a better-than-expected holiday season and otherretailers got a boost from inventory restocking during the fourthquarter. There is a risk that discounts to lure in shoppers maylower profit margins, Orlando said.

Apple Inc., spurred by holiday sales of the iPad, is predictedto report net income rose 56 percent to about $9.35 billion for thequarter ending in December, slightly higher than earnings growth of54 percent for the previous quarter.

Alcoa, which relies on markets outside the U.S. for about halfits revenue, said Jan. 5 it will close 12 percent of its smeltingcapacity after aluminum prices tumbled 18 percent in 2011 as theeconomic slowdown made some smelters unprofitable.

Analysts have cut their fourth-quarter earnings estimates forAlcoa in the past month to a 1-cent loss, from a projected 7-centprofit 30 days ago. The New York-based company reported profit of21 cents a year earlier.

International Business Machines Corp., the biggest computerservices provider, is predicted to post fourth-quarter net incomeof $5.51 billion, a 4.9 percent increase from a year ago. TheArmonk, New York-based company, which gets the majority of itsbusiness from outside North America, had earnings growth of 7percent in the third quarter and 8.2 percent in the second.

Cisco Turnaround

The European slump may slow the turnaround efforts of Cisco, thebiggest maker of networking equipment, which has been getting abouta fifth of its revenue from the region. Chief Executive OfficerJohn Chambers said in November that order growth in Europe wasexpected to slow to the mid-single digits, down from double-digitgrowth in recent quarters.

The San Jose, California-based company has reorganized its salesforce, giving it more flexibility in setting prices. That mighthelp Cisco overcome some customers' reluctance to buy now, makingit a tougher competitor, said Matt Robison, an analyst in SanFrancisco for Wunderlich Securities Inc.

What had been a year of improvement for U.S. industries erodedand a two-year equities rally came to halt as the debt crisis thatbegan in Greece in late 2009 drove borrowing costs to euro-erarecords in nations such as Spain and Italy. The InternationalMonetary Fund will probably cut its global growth forecast to alevel “consistent with reality,” Managing Director ChristineLagarde told reporters last week.

The S&P 500 lost 0.04 point to 1,257.60 in 2011, thesmallest annual change since 1947. The Stoxx Europe 600 Index fell11 percent and the MSCI Asia Pacific Index plunged 17 percent.

Fourth-quarter earnings per share for Stoxx Europe 600 companiesprobably declined 21 percent from a year earlier, the biggest dropsince the second quarter of 2009, according to data compiled byBloomberg. In the U.S., the 6 percent earnings growth forecast forthe S&P 500 would be down from 15 percent growth in the thirdquarter and 33 percent in the fourth quarter of 2010.

S&P profit excluding financial companies is projected byanalysts to rise 6.4 percent, about a third of the growth rate fromboth the third quarter of 2011 and fourth quarter of 2010.

U.S. profits are settling into more normal levels above economicgrowth after the recovery from the deepest recession since the1930s caused earnings to jump as much as 52 percent in the firstquarter of 2010, said Gina Martin Adams, a New York- based equitystrategist for Wells Fargo & Co.

Financial Companies

Europe's debt crisis dragged down earnings at U.S. banks,including JPMorgan Chase & Co. and Goldman Sachs Group Inc., ascorporations shelved initial public offerings and plans to raisecapital.

Banks may fare better this year, lending more as credit-carddebt stops deteriorating and foreclosures slow, allowing capitalreserves to move back to profits, Luschini said. The S&P 500Financials Index dropped 18 percent in 2011, making it the worst ofthe 10 industries tracked within the S&P 500.

“If we don't see something catastrophic happen, their earningswill continue to normalize,” Luschini said. “A lot of bad news hasbeen reflected already.”

JPMorgan is forecast to report net income of about $3.8 billion,a 21 percent drop from a year ago that is wider than a 3.5 percentdrop in the third quarter, estimates show. Citigroup Inc.'searnings are predicted to rise to about $1.9 billion.

Higher oil prices that drove earnings in 2011 for energycompanies such as Exxon Mobil Corp. and Chevron Corp., two of thetop four-weighted companies in the S&P 500, may be reversedthis year, said Jonathan Golub, chief equity strategist for UBSSecurities in New York. Oil prices had jumped to a closing high of$113.93 a barrel in April, fueling earnings, before dropping to$98.83 at the end of 2011.

Exxon, based in Irving, Texas, may report fourth-quarterearnings of $9.8 billion, an increase of 6 percent from a yearearlier, according to analysts' estimates. That's the slowestquarterly profit growth last year. Chevron, based in San Ramon,California, may have climbed 24 percent to about $6.6 billion, alower rate of growth from the third and second quarters.

European stagnation may curb demand for the petroleum exportsthat helped Valero Energy Corp. and Marathon Petroleum Corp. postnear-record profits in the first nine months of 2011.

U.S. chemical makers such as DuPont Co. and Dow Chemical Co.probably will report fourth-quarter earnings that fell from theprior quarter and from the year-earlier period.

Fiat, Ford

Fiat SpA, which will kick off earnings for European carmakers onFeb. 1, may post a 24 percent decline in fourth-quarter tradingprofit versus the third quarter, according to a Bloomberg survey ofanalysts.

Western European sales may fall 6.5 percent to 13.3 millionunits in 2012, said Stuart Pearson, a Morgan Stanley analyst inLondon. Carmakers “with strong balance sheets and high creditratings should continue to gain,” he said in a Jan. 4 note.

Volkswagen AG, Europe's biggest carmaker, may have boostedoperating profit 51 percent to 2.62 billion euros ($3.3 billion) inthe fourth quarter, according to a survey of five analysts. DaimlerAG's may have risen 47 percent to 2.29 billion euros.

General Motors Co., Ford Motor Co., and Chrysler Group LLCfinished 2011 stronger than analysts predicted, as annual U.S. autosales reached 12.8 million in the best year since 2008, when GM andChrysler sought U.S. bailouts. GM also reclaimed the top spot inworld vehicle sales from Toyota Motor Corp.

Toyota, Asia's largest carmaker, probably increased profit evenafter the record floods in Thailand disrupted output as it boostedproduction in other factories. The Toyota City, Japan- basedcompany may report net income of 115 billion yen ($1.5 billion) inthe quarter ended Dec. 31, rising from 93.6 billion yen a yearearlier, according to the average of six analyst estimates compiledby Bloomberg.

“Even with the losses from the Thai floods, global vehicle salesdefinitely grew from last year with the introduction of new modelsand as inventory normalized,” said Issei Takahashi, a Tokyo-basedanalyst at Credit Suisse Group AG who has a “neutral” rating on thecompany.

Nissan Motor Co., Japan's second-largest carmaker, may postprofit of 71.6 billion yen for the quarter, while Honda Motor Co.,the third-biggest, may report 73 billion yen, according to analystestimates. Profit at Hyundai Motor Co., South Korea's largestautomaker, probably climbed, helped by a weaker won and a 24percent gain in overseas sales during the quarter.

Microsoft, AT&T

Microsoft Corp. and Intel Corp. are coping with supplydisruptions related to the flooding in Thailand and will reportweaker earnings. Analysts estimate that software maker Microsoft'snet income declined last quarter, according to data compiled byBloomberg. Intel, the world's largest chipmaker, is forecast topost a net income gain of 9.2 percent, less than the 17 percentincrease in the third quarter.

AT&T Inc., the largest U.S. phone company, will probablypost its steepest drop in earnings, excluding some costs, in eightyears when it reports Jan. 26. The company said in a Dec. 7 filingthat the cost to subsidize the Apple iPhone for subscribers willhave “near-term negative impact on margins.”

McDonald's Corp., the world's largest restaurant operator, maysee its profit growth slow on higher wage costs. Fourth- quarternet income may have increased 6.9 percent to $1.33 billion, slowerthan the 8.6 percent during the third quarter.

Restaurants “have benefited a lot from a slack labor market,”Sara Senatore, a New York-based analyst at Sanford C. Bernstein& Co., said in a telephone interview. “But as you keep lappingthe benefits, it's harder to find incremental improvements,” shesaid.

The six biggest U.S. airlines, led by United ContinentalHoldings Inc. and Delta Air Lines Inc., probably will have acombined fourth-quarter profit of $126.1 million excluding one-time items, according to the average estimates of analysts surveyedby Bloomberg. That's two-thirds less than the $394.5 million groupprofit a year earlier as rising fuel costs and weaker demand forEurope flights weigh on results.

The weak economy also has reduced the volume of medicalservices, tamping earnings for drug and device makers andhospitals. Health insurers such as UnitedHealth Group Inc., thelargest in the U.S. by sales, were part of the only major healthsubgroup in which analysts surveyed have raised estimates.

'Beats and Raises'

“I'd expect some beats and raises,” said Sanford C. Bernstein'sAna Gupte, whose estimates beat other industry analysts, accordingto data compiled by Bloomberg. Gupte said Humana Inc. and AetnaInc. will top estimates the most.

Drugmakers such as Pfizer Inc., the world's largest, andhospital companies such as HCA Holdings Inc., the biggest U.S.operator, face grimmer prospects. In the last three months, analystearnings estimates were lowered for 14 of 17 large drugmakers,according to data compiled by Bloomberg. And six of eight hospitalcompanies saw earnings estimates lowered.

Politics in Europe and elsewhere will play a bigger role in themarkets this year as elections in the U.S., Russia, Germany andFrance and changes in China will affect leadership in half theglobal economy, Luschini of Janney Montgomery said.

“A change in policy behavior in one of these countries couldhave a marked influence,” he said.

Until then the world economy will limp along as Europe focuseson austerity and U.S. consumers continue to pay down debt, cappinggrowth below 2 percent, said Morganlander of Stifel Nicolaus.

“Global growth expectations will continue to be reviseddownward,” he said. “I would not be shocked by continuingdeterioration of earnings growth.”

Bloomberg News

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