UPDATE 2-US earnings now seen falling in Q3, first time in 3 yrs

Thu Jul 26, 2012 11:43pm IST

Related Topics

Stocks

   

By Caroline Valetkevitch and Ryan Vlastelica

July 26 (Reuters) - It's ugly out there and it could get worse.

Dismal U.S. corporate outlooks and worries about slower worldwide growth have pushed third-quarter earnings estimates into negative territory, which, if it came to pass, would be the first drop in three years.

Third-quarter earnings of Standard & Poor's 500 companies are now expected to fall 0.1 percent from a year ago, a sharp revision from the July 1 forecast of 3.1 percent growth, Thomson Reuters data showed on Thursday.

That would be the first decline in earnings since the third quarter of 2009, the data showed.

The more pessimistic view followed a string of disappointing results and cautious forecasts this week, most notably Apple Inc , the world's biggest company by market value. On Thursday, United Technologies Inc cut its full-year profit view to essentially unchanged from 2011's profit.

United Tech, along with many of the other companies offering more conservative views, cited slowing growth in China and lower demand from Europe as the primary reasons for its caution.

"We're looking at really slow growth," said Edward Hemmelgarn, founder and chief investment officer of Shaker Investments in Cleveland.

"Things are being impacted by the slowdown in the economy worldwide. Any company that does any overseas business is citing the fact that the rise in the dollar, especially against the euro, has hurt their revenue and earnings."

That said, the stock market has managed to hold together. The S&P 500 is still up about 8 percent for the year.

Some investors believe the slowing has been factored into stock prices, but the market has also been helped by a steady diet of monetary stimulus from the world's largest central banks.

TECH FEELS EUROPE'S PAIN

Excluding Apple, third-quarter earnings are seen declining 0.7 percent, while revenue for the quarter is expected to fall 0.3 percent, the data showed.

The falling forecasts are not limited to a few sectors. Earnings estimates have fallen in every S&P 500 sector except financials, with technology among the worst.

Earnings in the tech sector are now expected to rise only 5.8 percent - less than half the forecast of 13.1 percent growth, according to an estimate at the start of the month, Thomson Reuters data showed.

Among tech companies that recently cut their outlooks are Texas Instruments Inc, Intel Corp and Applied Materials.

Of the S&P 500 sectors, technology has the highest sales exposure to Europe - at about 25 percent, according to Bank of America/Merrill Lynch research.

The materials sector is forecast to see an earnings drop of 11.4 percent for the third quarter, worse than the forecast of a 3.3 percent decline at the start of July, Thomson Reuters data showed. Slumping commodity prices and reduced demand from China have hurt that sector.

SALES LOOK WORSE THAN EARNINGS

While earnings performance has held up so far for the second quarter - with results in from about half of the S&P 500 companies - revenue has looked much gloomier.

Just 41 percent of companies have beaten revenue estimates, the lowest since the first quarter of 2009 and only the fourth time in the past 10 years that the beat rate was under 50 percent.

Revenue growth is expected to have increased just 1.2 percent for the second quarter, Thomson Reuters data showed.

On the earnings side, about 65 percent of companies have topped earnings forecasts, slightly better than the long-term average of 62 percent. Profit growth was last estimated at 6.1 percent for the second quarter, on a par with expectations of 6 percent growth at the beginning of July.

Stocks had been hit hard by the latest round of poor results, with the S&P 500 falling for four straight days. But stocks have turned higher again, thanks to more supportive signs from policymakers.

The latest wave of hope came from European Central Bank President Mario Draghi, who said on Thursday that the ECB would do what was necessary to protect the euro zone, including fighting high bond yields.

Many European economies are in recession and leaders have been unable to find a long-lasting solution to the debt crisis, which will continue to hurt corporate results.

"There's going to be a lingering effect from the European turmoil," said Bryant Evans, investment advisor and portfolio manager at Cozad Asset Management, in Champaign, Illinois.

"We're all hopeful there's a fix around the horizon for the U.S. economy, but we also don't really expect it in the short run."

FILED UNDER: