Credit woes crunch profits
How badly the late summer's credit market problems harmed the economy is up for debate, but they are definitely having an effect on third-quarter earnings reports.
Large financial companies keep warning of big hits to their earnings because of fallout from the mortgage debt market, prompting analysts to ratchet down expectations for third-quarter earnings.
That's presenting investors with an ugly reality they haven't dealt with in nearly six years: a serious chance of an earnings contraction.
About 10 percent of the Standard & Poor's 500 companies have reported their earnings, and analysts expect third-quarter profit to be 0.2 percent lower than it was in the same period a year ago, says Thomson Financial. Some are calling for worse. S&P is forecasting a 2.5 percent decline.
That's a harrowing thought for investors, who haven't seen a decline in earnings growth since the fourth quarter of 2001, says S&P.
"Earnings aren't going to be good any way you look at them," says Howard Silverblatt of S&P.
While it's true investors have expected third-quarter results to be weak, the reality has been disappointing because earnings:
- Keep getting worse. Weeks ago, it looked as though third-quarter earnings growth was going to be 6.2 percent, Thomson says. Even that was quite a letdown from the 12.6 percent average quarterly growth the past two years. "Investors have not only been used to strong earnings but having them beat expectations," says Milton Ezrati of Lord Abbett.
- Contain land mines from financials. Wells Fargo Tuesday reported $490 million of mortgage-related write-downs. The bank reported earnings growth of 4 percent, the slowest rate since 2001. Disappointments from financial firms have been the No. 1 drag on earnings, says Nick Bohnsack of Strategas. Their third-quarter earnings are expected to be dip 9 percent, he says.
- Raise concern about the outlook. Hopes are still high for the fourth quarter. Analysts are calling for 10 percent growth in the fourth quarter. But that may prove too lofty, Bohnsack says. He expects the hangover from the problems in the credit markets to cap fourth-quarter growth at 6 percent.
Reuters Estimates' Ashwani Kaul says the third quarter is a write-off, but other sectors, namely technology, may kick in. Analysts expect tech earnings to grow 14 percent in the third quarter and 22 percent in the fourth.
Chipmaker Intel and Internet portal Yahoo beat earnings estimates when they reported after the close Tuesday. "We knew this quarter wasn't going to be great," he says. "But the question is what we do in the fourth quarter and next year."
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