Warnings on fourth quarter add to U.S. earnings worries

NEW YORK Fri Oct 12, 2012 5:03pm EDT

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NEW YORK (Reuters) - Third-quarter U.S. earnings have just begun, but already U.S. companies are sounding alarm bells about the fourth quarter.

Outlooks for the fourth quarter - just two weeks old - are so far decidedly more negative than positive. Thomson Reuters data shows 11 negative outlooks so far from Standard & Poor's 500 companies and no positive outlooks.

Third-quarter guidance, meanwhile, at the comparable period showed 6 negative outlooks and no positive.

The market has seen this play out before - companies systematically lower the bar, only to exceed estimates by a fair amount, resulting in "surprises" that bolster stock prices. This hasn't happened yet in this earnings season, but investors are on the lookout for it.

"It's really an issue of whether companies are trying to set the bar lower and give themselves an easier target to beat or whether it really does reflect a substantial risk of a slowing global economy," said Rick Meckler, president of investment firm LibertyView Capital Management in New York.

However, U.S. companies so far are having a tougher time beating analyst expectations in the third quarter, with 59 percent of companies exceeding forecasts, below the 62 percent long-term average, based on Thomson Reuters data. And year-over-year growth is expected to be negative for the first time in three years.

Revenue trends have also been weak: Just 50 percent of companies that have reported have beaten estimates on revenue, compared with the 62 percent average, he said.

Warnings continue to come in for third-quarter reports, helping to drag down earnings estimates for the period. Several of those warnings have come from Kohl's (KSS.N) and other retailers, which do not report results until early November.

"For a lot of companies, particularly the multinationals that rely on global growth, I suppose China and Europe are at the heart of their fears," Meckler said.

Europe was cited more than any other reason for negative forecasts from S&P 500 companies for the third quarter, a Thomson Reuters survey showed, but China is a growing concern.

The slowdown in China's economy is expected to have one of the biggest effects on earnings in the U.S. technology sector, which had been among the earnings leaders. Since July 1, tech has seen a 10.4 percent drop in estimates, second worst only to materials - which is also affected by overseas demand.

Among companies guiding lower for the fourth quarter was software maker Adobe Systems (ADBE.O). It cited a faster-than-expected shift to subscriptions by customers.

Aluminum company Alcoa Inc (AA.N), which did not give a fourth-quarter earnings forecast, lowered its global aluminum consumption outlook to 6 percent growth, from 7 percent previously for 2012, and cited China as the main factor.

With results in from just 34 S&P 500 companies, estimates for earnings show a decline of 2.5 percent from a year ago, down from an October 1 forecast for a 2.1 percent fall.

If the percentage of companies beating earnings expectations stays at 59 percent, it would be the weakest earnings beat rate for any quarter since the fourth quarter of 2008, said Thomson Reuters earnings analyst Greg Harrison.

Estimates for the fourth quarter show S&P 500 earnings growth of 9.6 percent, down slightly from an Oct 1. estimate for growth of 9.9 percent, Thomson Reuters data showed.

Analysts said stocks could be in for more losses if the trend continues. The S&P 500 .SPX is down 0.2 percent since Wednesday, the day after Alcoa reported, and is off 3.1 percent since its September 14 intraday high for the year.

But Mike Jackson, founder of Denver-based investment firm T3 Equity Labs, believes the pessimism that has seeped into the market in recent weeks is overstated.

"Analysts overreact more negatively and lag positively," he said.

He sees S&P 500 industrials and telecommunications as sectors most likely to surprise to the upside on third-quarter earnings, along with energy, which has seen a big slide in earnings estimates.

(Reporting By Caroline Valetkevitch; Editing by Tim Dobbyn)

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Comments (2)
ConstFundie wrote:
Romney cooking the books? :P

Oct 12, 2012 12:23am EDT  --  Report as abuse
breezinthru wrote:
I have to disagree with Mike Jackson. The market optimism is overstated. The S&P should not have been rising in September.

There has been a modest increase in American economic activity but it is the only bright spot in the world. Unfortunately, that brightness is an illusion. The fundamentals are unchanged. Wall Street is making money on mortgages, but 11 million homeowners are still deeply underwater.
Student debt is at historical highs and credit cards are still allowed to charge rates that are more than 10% higher than what usury laws once allowed… even though the Fed funds rate have been near Zero for years.

The annual deficit continues to be greater than one trillion USD per year. If America was forced to live within its means right now, our economy would collapse under the new austerity.

China is also desperately hoping for a soft landing though there is little reason for anyone to expect one. Investors are also obviously looking at the Eurozone with their eyes closed.

Investors are in for a rough ride because the average American is in for a rough ride. It’s not enough for Wall Street to be making money when their citizen customers are struggling under excessive debt burdens and economic malaise.

Oct 13, 2012 1:01am EDT  --  Report as abuse
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