Analysts Expect a Bad US Quarterly Earnings Season

While recently some positive data on the US employment and service sectors spurred optimism about the world’s largest economy, the modest growth might not be enough to offset the negative impact of the global economic slowdown on US companies’ corporate earnings.

On 7 October 2012, the Financial Times reported that analysts expected earnings for the quarter ended September to decline, marking one of the worst quarterly earnings seasons in the US.

The FT quotes Wall Street analysts who expect that third-quarter earnings per share for S&P 500 companies will decrease by 2.7 percent relative to the same quarter in 2011.

“We expect corporate profits will be negative and revenues soft, as the global slowdown and below average economic growth in the US has affected companies,” points out Jeff Kleintop, chief market strategist at LPL Financial (NASDAQ:LPLA).

In particular, Energy and companies connected to producing construction materials are expected to lead the earnings downturn, whereas the financial sector is set to be one of the few bright spots.

The New York Times reports that among the companies scheduled to report quarterly earnings are the aluminium producer Alcoa (NYSE:AA), the energy producer Chevron (NYSE:CVX) and the financial services company JP Morgan & Chase (NYSE:JPM).

While three months ago analysts had projected a 1.9 percent growth, in the past quarter companies cut their full-year profit outlooks, fuelling the newer more pessimistic forecast. FedEx (NYSE:FDX) and UPS (NYSE:UPS) cut their full-year guidance during their last earning releases on account of the slowdown in global trade.

Bloomberg reports that Caterpillar (NYSE:CAT), the world’s biggest construction and mining equipment maker, cut its forecast for 2015 earnings, noting that profit would be $12 to $18 a share, compared with previous projections of $15 to $20. In August, Caterpillar’s chief executive told the FT that it could be another five years before Europe’s economy began to grow.

Bloomberg quotes Nigel Gault, chief U.S. economist at IHS Global Insight, as saying that the global slowdown reduced export growth, one of the two key drivers of recovery. “The other key driver, business fixed investment, is also weakening.” HSBC Holdings Plc and Markit Economics surveys of purchasing managers indicated that business activity in six of the top 10 export markets for US manufactured goods, including China, Japan and the UK, contracted in September. In addition, slower growth was observed in Canada and Mexico, the largest markets for US goods.

Analysts’ expectations for reduced earnings are expected to weigh on the S&P 500 index, which has advanced 16 percent so far in 2012. Stock prices are supported by the US Federal Reserve, which buys large amount of bonds, lowering interest rates and making riskier assets such as equities more attractive to investors.

“If we see that the markets do not correct even after earnings disappoint and guidance gets worse, then it will be clear that fundamentals have given way to the Fed,” points out Quincy Krosby, a Prudential Financial (NYSE:PRU) market strategist, as quoted by the FT.

Equity investors have already started looking forward to the final quarter of the year expecting a rebound in profits, with S&P 500 companies being on course for record cash profits for 2012. Yet, that outlook may suffer if companies express caution about their future profit.