Investors fear earnings slump far from over
By Rachel Beck
Associated Press
NEW YORK — Now for the really bad news on Wall Street, and it's not just today's disappointing earnings. It's the fear that tomorrow might be even worse.
Investors had bet big on a third-quarter rebound in corporate profits, but that doesn't seem to be holding true with dozens of companies from McDonald's to Honeywell saying their quarterly results will be lower than expected.
And that's not the end of it. The earnings outlook for the coming months now looks murky, too.
No wonder investors have taken to the sidelines. Who wants to rush back into a market without any clue as to when earnings will rise again?
"Investors would be OK accepting earnings warnings in the third quarter if they thought that things were about to get better, but they have no idea when that will happen and it is troubling," said Marc Gerstein, director of research at the investment strategy firm Multext.com.
If you asked just about anyone on Wall Street earlier this year when the big rebound in corporate profits would kick in, the consensus was the third quarter.
It seemed right. The economy over the winter and into the early spring appeared to be slowly recovering from last year's recession. That would eventually translate into increased demand for the nation's businesses, which would boost profits.
Earnings of the companies in the broad Standard & Poor's 500 index were expected to grow 16.6 percent in the third quarter, after falling 11.5 percent in the first quarter and rising 1.4 percent in the second quarter, according to analysts surveyed by Thomson First Call.
But it now looks like the comeback of corporate earnings is still way off.
The economy has failed to recover at a rapid pace, and there are even some economists who believe that it is possible for it to slip back into a recession.
"We have had a terrible profit recession, and it continues because we are not getting a strong enough bounce in the economy to really turn the profit picture around," said Edward Yardeni, chief investment officer at Prudential Financial in New York.
The outlook has become increasingly troubled in recent weeks. Many companies have cut their earnings expectations as the quarter comes to a close, and analysts have been slashing their earnings forecasts.
Most companies will report their earnings for the July-September period in the coming weeks.
That has fueled a significant selloff in the stock market, sending the Dow Jones industrial average to its lowest level in four years and the Nasdaq composite index tumbling to a six-year low.
Part of what's unnerving investors is the breadth of the bad news. It's not just the already battered technology and telecom companies that are facing depressed earnings. Retailers, banks and manufacturers, too, are saying that their profits will be lower than expected.
Analysts are predicting that earnings growth will come in at about 8 percent for S&P 500 companies, half of what was expected on July 1, said Thomson First Call.
It's gotten so bad that earnings warnings are increasingly outnumbering positive earnings news. For every company that says its results will beat expectations for the quarter, 2.2 give warnings, according to Thomson First Call. In the second quarter, there were just 1.2 warnings for every positive announcement.
