Profit projections slide for fourth quarter

Traders work on the floor of the New York Stock Exchange August 9, 2007.

NEW YORK (Reuters) - Projections for S&P 500 companies' fourth-quarter earnings swung to a 6.1 percent drop on Monday from an 11.5 percent rise on October 1, in the biggest quarterly move since Reuters Estimates started compiling analysts' forecasts in 1999.

The sharp decline comes as financial write-downs and an economic slowdown take their toll on corporate results, pushing down forecasts for the fourth quarter.

First- and second-quarter estimates have also fallen significantly. Analysts now expect first- and second-quarter earnings to rise just 5.1 percent and 5 percent, respectively, according to Ashwani Kaul, senior market analyst at Reuters Estimates.

That's down from an October 1 expectation of 11.4 percent earnings growth for the first quarter and 9.4 percent growth in the second.

"The surge in analysts' conservatism is primarily the result of the subprime crisis in the U.S. and globally and its impact on the write-downs in the financial sector," said Ned Riley, chief investment officer at Riley Asset Management.

The financial sector, which has been battered by losses tied to subprime mortgages, is expected to see year-over-year earnings down 62 percent in the fourth quarter.

"Forecasters are also becoming more sensitive to the possibility of recession in the United States, and those macro forces will exert huge influence over consumer spending in the United States as well as globally," Riley said.

There were more profit warnings than positive pre-announcement statements in December, according to Reuters Estimates. Of the companies that gave forward-looking guidance statements, 193 companies gave negative guidance compared with 161 that gave positive guidance.

"I think the same will be true for 2008," Riley said. "While there is still a fairly optimistic bias for profits at the moment, I expect first- and second-quarter earnings forecasts to drop and that might happen sooner than has been the case in the past two quarters."

The huge swing in the earnings forecasts highlights their limitations, Riley said.

"Analysts forecasts are merely an extrapolation of a trend and a reflection of management's own optimism about their specific companies. Generally speaking, I would rely more on one's assessment of the economic future and how each economic sector is impacted by that," he said.

The technology sector is expected to be the strongest fourth-quarter performer, with analysts forecasting a 25 percent gain. Health care comes second with analysts expecting gains of 12 percent.

(Editing by Leslie Adler)