By Theo Francis and Kate Linebaugh 

America's biggest companies logged a fourth straight quarter of shrinking profits and tepid sales, as weakness from energy companies and lower business investment more than offset U.S. consumer strength.

Earnings reports for the second quarter showed improvement from the first three months, but concerns about the country's economic prospects are casting a shadow over the outlook for the remainder of the year. Executives said they are worried about slowing industrial production and a tumultuous political climate.

Construction machinery giant Caterpillar Inc. last week cut its annual profit forecast, warned of layoffs and said it doesn't expect sluggish global growth to reverse this year. Praxair Inc., which makes industrial gases, said it would have to cut costs at one of its business lines as a result of a manufacturing slowdown in the U.S.

"Industrial production is lackluster," said Michael Kneeland, chief executive of United Rentals Inc., which rents equipment to construction and industrial firms. The company has moderated capital spending as reduced demand from the oil industry left a glut of equipment available in the market.

With just over two-thirds of S&P 500 companies reporting results, adjusted earnings -- which exclude various items deemed unusual -- are expected to fall for the fourth straight quarter, down 2.6% from the same period last year, according to Thomson Reuters. Revenues are also forecast to slip 0.4%, the sixth straight quarterly decline.

The pain is broad-based: Only the consumer-discretionary, health-care and utilities sectors are expected to see profits grow by more than 5%. Quarterly earnings are forecast to decline by 87% for energy companies, 3.6% for financial firms and 1.4% for telecommunications companies, according to Thomson Reuters.

Energy companies have been suffering for more than a year, with oil prices collapsing from around $115 a barrel in mid-2014 to a low of $27 in January. But profit declines are slowing as prices have somewhat rebounded to around $40 a barrel, and many analysts expect results to keep improving in the third and fourth quarters.

Excluding the hard-hit energy sector, second-quarter earnings are expected to rise by a still-slow 1.8%, while revenues are likely to increase about 2.6%, Thomson Reuters said.

Analysts polled by Thomson Reuters now forecast that the third quarter will barely show profit growth, predicting an average increase of 0.3% for companies in the S&P 500 compared with expectations of 2% growth a month ago. Earnings forecasts often become less optimistic as a quarter progresses.

The U.S. stock market has remained largely resilient as investors have favored equities in the face of low yields from other investments. However, following seven record closing highs posted in July by the S&P 500 and the Dow Jones Industrial Average, the market is showing some signs of jitters. The Dow fell for a seventh straight day on Tuesday.

The muted manufacturing and industrial picture was countered by some encouraging results from consumer-oriented companies and high-profile tech firms like Facebook Inc. and Google parent Alphabet Inc. that have seized on mobile advertising. Online retailing giant Amazon.com Inc. clocked its third straight profit record, helped by stronger product and cloud-computing revenue.

Outdoor-equipment retailer Cabela's Inc. reported its first increase in same-store sales since third-quarter 2013, though margins suffered from heavier discounting. Fortune Brands Home & Security Inc., which sells cabinets, plumbing fixtures and door locks, noted higher new-home construction and said that remodeling activity continued to reflect strong pent-up demand from consumers.

"We hear through all of our builder relationships that everybody's busy, " CEO Christopher Klein said.

Overall, consumer spending rose by 4.2% in the second quarter, the U.S. Commerce Department reported, marking the strongest growth since late 2014 and offsetting continued declines in business investment. Meanwhile, average hourly earnings are starting to increase.

But some consumer-driven companies are warning of trouble. "We continue to face a relatively slow-growth, volatile world," Jon Moeller, chief financial officer of Procter & Gamble Co., which sells Gillette razors and Pampers diapers, told investors Tuesday.

The U.S. economy got its weakest annual start since 2011, tracking a 1% growth rate for the first half of 2016, the Commerce Department reported Friday. Gross domestic product increased just 1.2% in the second quarter.

"You're still looking at a sluggish economy," said Joseph LaVorgna, Deutsche Bank's chief U.S. economist.

And recent events from terrorist attacks and police shootings to the heated political rhetoric around the U.S. presidential election has given pause to some companies.

Starbucks Corp. CEO Howard Schultz said the U.S. restaurant industry experienced a "profound weakening in consumer confidence" in the latest quarter, cutting into customer traffic and ending the coffee chain's 25-quarter string of at least 5% sales growth excluding newly opened and closed stores.

"We have a situation where you have a very uncertain election, you have domestic civil unrest with regard to race, and I think the issues around terror have created a level of anxiety," said Mr. Schultz. "So we are no longer looking at just an economic downturn."

McDonald's Corp. CEO Stephen Easterbrook attributed softer consumer demand in part to general economic uncertainty, along with factors like a widening gap between the cost of restaurant meals and groceries. In the U.S., the company's comparable sales rose by 1.8%, well below the 3.2% growth expected by analysts.

"Whether through elections or through global events, people are slightly mindful of an unsettled world," Mr. Easterbrook told investors last week. "When families are uncertain, caution starts to prevail, and they start to hold back."

Write to Theo Francis at theo.francis@wsj.com and Kate Linebaugh at kate.linebaugh@wsj.com

 

(END) Dow Jones Newswires

August 02, 2016 19:06 ET (23:06 GMT)

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