Wall Street fears dismal third-quarter reports
By Joe Bel Bruno
Associated Press Business Writer
By Joe Bel Bruno
NEW YORK — Inside major Wall Street firms and across their trading floors, concerns about corporate earnings are getting difficult to ignore.
America's blue chip companies — big business stalwarts like Merrill Lynch & Co. and International Business Machines Corp. — will release third-quarter results in the coming weeks. After a quarter marked by tightening credit conditions and concerns about a slowing economy, profit reports are expected to be the worst since 2001.
And early signs last week seemed to confirm what many on Wall Street feared — that results will show no growth from the year-ago period. Investors got a pair of profit warnings from International Paper Co. and Chevron Corp., while results from General Electric Co. and aluminum producer Alcoa Inc. failed to impress.
Money managers in charge of multimillion dollar portfolios believe much more weight will be put on performance this quarter. Not only will individual results be a good indication of the health of corporate profits, but what companies say about the future will be the best indication yet about the economy.
While most economic data released is backward looking, outlooks by major companies give investors a glimpse of what might lie ahead. Some analysts believe companies are trying to get bad news out in the open, take their lumps during the third quarter and return to double-digit profit growth in the fourth quarter and beyond.
That's important because financial stocks — which were the hardest hit during the summer's volatility — represent about 25 percent of the S&P 500's overall earnings. The reduction in their results could shave about $7 billion from the index's overall profit number, which is usually about $200 billion, according to the rating agency.
While financial stocks are expected to have fared poorly, that could be somewhat offset from strength in healthcare and technology companies. But cyclical consumer companies such as electronics retailer Best Buy Co. are also expected to have had a tough quarter as consumers, mindful of falling home values and the summer's turbulence on Wall Street, watched their spending.
David Dropsey, senior research analyst at Thomson Financial, said analysts' project S&P 500 members will have had a 0.10 percent growth rate during the quarter. That number was cut from the 6.2 percent forecast on July 1 and 3.9 percent on Oct. 1 as Wall Street analysts began to trim their expectations.
But, he also cautions that the big focus for most market players will be what they say about the future. Right now, both S&P and Thomson project about a 13 percent growth rate for 2008.