Big-name profit warnings may mean a pullback

Wall Street may be bracing for a pullback as U.S. earnings season begins next week – if the clouds of profit warnings from bellwethers ranging from FedEx to Hewlett-Packard lead to a downpour of lower profits – or even losses.
Thanks to aggressive stimulus plans from central banks around the world, the Standard & Poor’s 500 index gained 5.8 percent over the third quarter. That sharp rally occurred even as companies were struggling. Earnings for that period are forecast to fall 2.4 percent from the year-ago quarter. If that happens, this would be the first earnings decline in three years, according to Thomson Reuters data.
Market strategists and investors say U.S. stock valuations are broadly out of sync with earnings estimates. They forecast a pullback in stocks in the coming weeks as more companies report results and reduce expectations for the fourth quarter and beyond. Fourth-quarter estimates for S&P 500 companies show a 9.5 percent gain in profit from a year ago, according to Thomson Reuters data. Analysts say that outlook is too high, given what investors are already hearing from the corporate world.
“It’s a divergence right now where the valuations as far as equity prices (are concerned) have soared, and are really putting in place a stronger economy and stronger fundamentals,” said Alan Lancz, president of Alan B. Lancz & Associates Inc., an investment advisory firm in Toledo, Ohio. “But earnings will be the telltale sign,” Lancz added. “And if the guidance isn’t particularly strong, the market might be setting itself up for a little disappointment. I don’t see a major correction, but I do see a pullback.”
The earnings season will kick off on Tuesday with results from Dow component Alcoa (AA.N) after the bell. Analysts expect Alcoa’s third-quarter results to show it broke even, down from a profit of 15 cents per share a year earlier, according to Thomson Reuters I/B/E/S.
BLAME EUROPE: Nearly half of S&P 500 companies guiding lower for third- quarter earnings blamed weakness in Europe, according to a Thomson Reuters survey. Another 11 p e rcent blamed the weak global economy, 8 percent cited strength in the U.S. dollar, and 6 percent cited the slowdown in China, the survey showed.
Weakness in the U.S. economy hasn’t helped. The final read on U.S. second-quarter gross domestic product last month showed growth of just 1.3 percent, weaker than an expected 1.7 percent.
On Thursday, software maker Informatica Corp (INFA.O) issued a profit warning and said business conditions were worsening in Europe. The software company is considered a bellwether because its products are used alongside those made by larger software companies.
TECH FEELS CHILL FROM CHINA: While estimates have come down sharply in all 10 S&P 500 sectors since the start of the year, technology is one area where the lower expectations are most notable. Slower growth in China is a big factor in that trend.
Earnings growth in the tech sector is expected to be just 2.3 percent for the quarter, compared with a July 1 forecast of 13.1 percent. Apple Inc (AAPL.O) is a big driver of those gains. Technology’s profit growth has been crucial for the S&P 500. Minus technology, S&P 500 earnings are expected to be down 3.4 percent. The tech sector is where the slowdown in China’s economy is having the biggest impact, Kleintop said. “They consume a lot of U.S. technology products,” he said.
Recent data shows that the pace of growth in China, the world’s second-largest economy, may slow for a seventh quarter, straining earnings in the tech and materials sectors. Applied Materials Inc (AMAT.O) lowered its third-quarter estimates in August, citing China and Europe. On Wednesday, the chip gear maker said it planned to cut its global work force by 6 percent to 9 percent.
FedEx Corp (FDX.N), the world’s second-largest package delivery company, cut its fiscal 2013 forecast on September 18, saying a weakening global economy gives its customers a reason to switch to less expensive and slower shipping options. FedEx said its earnings could drop as much as 6 percent for its fiscal 2013 year, which will end in May. On Wednesday, shares of Hewlett-Packard Co (HPQ.N) fell a whopping 13 percent to a nine-year low a fter it forecast a far steeper-than-expected drop in 2013 profit. The slide in HP’s stock price sharply cut the Dow industrials’ gains for the day.
The S&P 500 sectors showing the biggest projected earnings decline are materials, forecast down 24 percent, and energy, expected down 18.8 percent, Thomson Reuters data show, with those declines tied largely to the global slowdown.