One widely used gauge of profits forecasts that earnings will
have grown 0.9 percent in the first quarter, compared with the
first quarter of 2011, for companies that make up the Standard & Poor's 500-
Corporate profits have been among the brightest lights of the U.S. economic recovery, helping to lift the stock market more than 25 percent since October.
But analysts predict that when the first-quarter reporting season starts in earnest in the coming week, U.S. companies will show the slowest rate of growth in operating earnings in three years.
In the same period last year, operating earnings per index share were $23.63, a result of growth of 19.7 percent from the first quarter in 2010.
"It is the lowest quarter of growth we have seen since the third quarter of 2009," said Christine Short, the senior manager for S&P Global Markets Intelligence. Other surveys, by Thomson Reuters and FactSet, show similar trends of weak first-quarter growth, compared with the year before.
Many companies struggled through the difficult period after the 2008 financial crisis by trimming costs and laying off employees. Now analysts say that the cutbacks may have reached their limits and that profits could very well have peaked in the second half of last year.
The euro zone debt crisis, slowing growth in Asia and emerging markets, and inflation in commodity prices are also expected to have hurt performance, analysts said.
Analysts do not expect the European debt crisis "to be fully dealt with in the first half of the year," said Ms. Short. "There is too much uncertainty looming to say how it is going to affect corporate earnings."
Part of the reason the numbers will show weakness is also smoke and mirrors: Profits were starting to grow a year ago as the economy rebounded from the financial crisis, so comparisons with 2011 will be relatively mild.
"You still have growth, but it is at a slower pace," said Lawrence Creatura, a portfolio manager at Federated Investors.
Three of the 10 sectors of the S&P 500 index -- the industrial, technology and consumer staples companies -- will show earnings growth in the first quarter of 2012, according to the forecast. The energy industry is expected to show flat earnings.
Of the other six, materials and telecommunications are expected to record the largest drops, partly because of shrinking global demand, according to Ms. Short.
Among the companies with lowered forecasts are the steel companies Nucor and Steel Dynamics. Nucor said March 15 that it expected first-quarter results in a range of 30 cents to 35 cents a share, down from 50 cents in the same period in 2011.
Because investors are being prepared for what they might see in the coming season, analysts said they did not expect the lower growth to cause any major retreat in the stock market. But the guidance the companies will give investors for the current quarter and the rest of the year is a much bigger risk to sentiment.
Barry C. Knapp, the head of U.S. equity portfolio strategy at Barclays, said Barclays was estimating a retreat in the S&P 500 -- albeit less than 10 percent -- if investors are disappointed by companies' guidance.
Still, equities are inexpensive considering the current low interest rates, Mr. Creatura said.
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