** Earnings Review **
US Q3 earnings - A broken leg for the bull market
By Richard Melville
NEW YORK, Oct 28 (Reuters) - Absent a magical finish, U.S. companies are poised for their worst quarterly profit performance in seven years, shattering a pillar of the record- setting bull market.
With the results of 388 -- nearly 80 percent -- of Standard & Poor's 500 companies in the books, operating profits are down 3.4 percent, according to research firm First Call. A decline of any sort would be the first since 1991, a recession year.
But amid the wreckage, pockets of relative strength like technology and the fact that earnings are topping sharply reduced estimates have sparked a recovery from the market's late summer lows, when analysts argued that investors were scurrying to price in a doomsday scenario.
The question now confronting Wall Street is whether or not the recovery is sustainable or simply a "bear trap" lying in wait.
Optimists point to the fact that market's rebound has corresponded in degree and pattern to the out-performance of earnings to expectations.
"If anything, the numbers so far are a little better than expected and last week we had a whole host of positive numbers, particularly out of technology," said Jack Shaughnessy, chief investment strategist at Advest.
Tech bellwethers like International Business Machines Corp. <IBM.N>, Microsoft Corp. <MSFT.O> and Lucent Technologies Inc. <LU.N> all beat Wall Street forecasts with profits and helped fuel a rebound in the previously beaten down group.
Small caps, where earnings have also been generally favorable, have also outperformed recently, Shaughnessy said.
"In that way this is an old-fashioned market, where earnings still play a key role," he said.
But for pessimists, there is no escaping the fact that the top U.S. companies produced less profits this quarter than a year ago and offer little hope of a near-term turnaround.
The market's recovery rally in the face of declining earnings is open to two interpretations against that backdrop, said Charles White, managing director at Avatar Associates.
"One is that the recent (Federal Reserve) rate cuts served to trigger a grand new bull market that will carry us to the new millennium," he said "The other is that events in Asia and Latin America are causing deflationary conditions to develop, in which case we are in the midst of a bear market rally."
Of the two, he said, the second is far more likely.
"Looking at earnings visibility going forward, there is a greater deal of uncertainty now than there has been in recent history," White said.
According to research tracking firm First Call, profits at S&P 500 companies were 3.4 percent lower in aggregate versus a year ago through Wednesday morning, with the results of 388 of the companies in the books.
Behind that figure lie some key unusual items. For example, strikes at General Motors Corp. <GM.N> alone were responsible for a full percentage point of the decline, First Call said.
But there were also some grim stories Wall Street had not anticipated, such a steep profit drop at BankAmerica Corp. <BAC.N> stemming in part from losses related to loans the bank had extended to a hedge fund.
Indeed, financials -- along with energy companies, where low oil prices have played havoc with results -- have been a chief drag on the overall large cap profit picture.
As of September 30, financials comprised 15.72 percent of the market cap-weighted S&P 500 index, second only to technology in terms of representation, while energy contributed another 7.59 percent.
For those looking for a bright side, First Call research director Chuck Hill noted that retailers, a group where generally positive results are anticipated, have yet to report in force and should help trim the overall decline.
Even there, the economic outlook has become somewhat shakier, however. U.S. consumer confidence reached a 22-month low in October, the Conference Board said Tuesday, a reading the economic research firm said could bode ill for the critical Christmas shopping season.
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My note. The 1987 market dip or crash no impact upon the holiday shopping season and Greenspan was not giving gifts that year either. |
