NEW YORK (Reuters) — U.S. companies are
sounding the alarm on fourth-quarter earnings, lowering profit
estimates just as the stock market is poised to end its best year
since 1998.
The ratio of profit warnings to positive outlooks for the current
quarter is shaping up to be the worst since at least 1996, based on
Thomson Reuters data.
More warnings may jolt the market next week, but market watchers say
this trend could be no more than analysts being too optimistic at
the beginning and needing to adjust downward.
Stocks rallied on Friday after a stronger-than-expected U.S.
payrolls report and ended nearly flat on the week after eight
straight weeks of gains. The Standard & Poor's 500 index <.SPX> is
up 26.6 percent for the year to date, on track for its best yearly
gain in 15 years.
"There's a natural tendency on the part of Wall Street in any given
year to be overly optimistic as it relates to the back half of the
year ... It isn't so much the companies' failing, it's where Wall
Street has decided to place the bar," said Matthew Kaufler,
portfolio manager for Clover Value Fund at Federated Investors in
Rochester, New York.
So any negative news about earnings may "already be in the stock
prices," he said.
The market has rallied even though it is faced with the inevitable
withdrawal of the Fed's stimulus, the drag on the economy of
stubborn high unemployment and the threat of rising interest rates.
As the quarter heads to a close, economic data, including the upbeat
November payrolls report, suggest the recovery is building momentum,
so much so that some investors worry the Federal Reserve may begin
curbing its stimulus sooner rather than later.
The signs of a strengthening recovery and uncertainty over when the
Fed will act have overshadowed a lot of earnings news lately, and
that trend is expected to continue.
U.S. primary dealers surveyed by Reuters on Friday said they expect
the Fed will start reducing its bond-buying program no later than
March. A handful of firms expect the central bank to take action as
early as December.
The policy-making Federal Open Market Committee's next meeting is
scheduled for December 17-18.
Still, estimates for fourth-quarter S&P 500 earnings have fallen
sharply since the start of the year when analysts were building in
much stronger profit gains for the second half of the year.
Earnings for the quarter are now expected to have increased 7.8
percent from a year ago compared with estimates of 17.6 percent at
the start of the year and 10.9 percent at the start of the fourth
quarter.
Natalie Trunow, chief investment officer of equities at Calvert
Investment Management, which has about $13 billion in assets, said
the outlooks might not be enough to reverse the positive momentum in
the market at least in the near term.
"To some degree, (corporate) guidance is used to manage earnings
expectations," Trunow said. "In the first quarter, I think people
will expect tapering, so that's a negative. The earnings season will
have to compensate for that. If (fourth-quarter) earnings are softer
than expected, it will be a double negative."
The 11.4 to 1 negative-to-positive ratio of earnings forecasts sets
the fourth quarter up as the most negative on record, based on
Reuters data.
So far 120 companies have issued outlooks. In a typical quarter,
between 130 and 150 S&P 500 companies issue guidance.
In small and mid-cap stocks, the trend appears much less gloomy.
Thomson Reuters data for S&P 400 companies shows 2.2 negative
outlooks for every one positive forecast, while data for S&P 600
companies shows a similar ratio.
The S&P 500 technology sector so far leads in negative outlooks with
28, followed by consumer discretionary companies, with 22 warnings
for the fourth quarter.
Steep holiday discounts are expected to result in thinner profit
margins for some retailers in the fourth quarter.
Third-quarter growth data showed a sharp rise in business
inventories and declining consumer demand, raising questions about
the impact on earnings.
"It appears while the percentage (of warnings) is high, it's still
not really infiltrating to all sectors," said Peter Cardillo, chief
market economist at Rockwell Global Capital in New York. "Obviously
it impacts the individual (stocks), but maybe not the market trend."
Signs of a disappointing start to the holiday shopping period
dragged on consumer discretionary shares this week. The sector <.SPLRCD>
declined 0.7 percent for the week.
The weakness gives investors further reason to focus on November
retail sales data, which is due Thursday and likely to be the key
report of the week.
"The big news will be retail sales," Cardillo said. "It ties in with
consumer spending" ahead of the holidays.
(Reporting
by Caroline Valetkevitch; editing by Kenneth Barry)
The ratio of profit warnings to positive outlooks for the current
quarter is shaping up to be the worst since at least 1996, based on
Thomson Reuters data.
