One optimistic overtone on Wall Street has been that corporate profits would trounce estimates again this quarter. This time that rosy scenario is not panning out.
More than half of the companies in the Standard & Poor's 500 index, 275, have now reported third-quarter results. And investors are realizing there's little chance that U.S. companies will be able to prove the pessimistic earnings forecasts wrong.
"Everyone thought expectations were down so much it was easier for companies to get way ahead of them," says Sheraz Mian of Zacks Investment Research. "The weakness that was expected turned out to be the true picture."
Wall Street's displeasure over the weak earnings performance is translating into a weak streak for the stock market. The S&P 500 index is off 2% since Oct. 9, the day earnings season got its unofficial kickoff when Aloca, a Dow Jones industrial average component, reported. The worrisome elements of earnings season include:
Weak top line. Investors were hoping companies would find ways to drive more business in the door and boost revenue. That hasn't been the case. Just 36% of companies have reported better-than-expected revenue, well below the 56% that usually do, says John Butters of FactSet. All told, revenue is coming in 1% below year-ago levels, and estimates had been for flat revenue, he says.
Lack of earnings firepower. The bar for earnings growth had been dropped so far that it seemed companies might leap over it. That wasn't the case. So far, 62% of companies have beaten estimates, which may be in line, but disappointing given the low expectations. Earnings are coming in only 1.1% higher than a year ago, the lowest growth in three years and well below the 7.4% growth expected at the beginning of the year, S&P Capital IQ says.
Uninspiring outlook. Investors might have tolerated the lackluster third quarter if the ongoing fourth quarter was looking solid, but that's not happening either. So far, 33 of the 43 companies to give guidance on the fourth quarter have given a negative outlook. The ratio of negative to positive guidance is 16.5, well below the 10-year average of 2.0, S&P Capital IQ says.
And dour forecasts could be the biggest problem, as analysts are calling for earnings growth to rebound by 12% in the fourth quarter, says Howard Silverblatt of S&P Dow Jones Indices. "Fourth-quarter estimates look (overly) optimistic," he says. "That's a concern."
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