U.S. earnings optimism slipping due to economic woes

By Caroline Valetkevitch

NEW YORK (BestGrowthStock) – As one earnings season comes to a close, optimism about third-quarter U.S. profits growth is slipping as investors confront slack economic demand that is dimming prospects for corporate sales and profits.

With just a handful of companies left to report, S&P 500 earnings growth was 38.4 percent in the second quarter compared with the second quarter of 2009, according to Thomson Reuters research.

That’s not expected to be repeated in the third quarter. Estimates are roughly where they were on July 1, the start of the new quarter. Third-quarter earnings are expected to rise 24.9 percent versus a year ago.

“This may be one of the last quarters where earnings look as good as they are looking. We already see, for example, they’ve been slowing down or revising down for 2011,” said Pankaj Patel, analyst at Credit Suisse in New York.

Strategists believe profit margins may have been stretched to their limit. While 75 percent of Standard & Poor’s 500 (.SPX: ) companies exceeded estimates, U.S. productivity fell by 0.9 percent in the second quarter, suggesting companies may not be able to wring more profits out of their tightly staffed work forces.

The margin rate is at 8.9 percent for S&P 500 companies in the second quarter, up from a rate of 6.2 percent a year ago, said Howard Silverblatt, index analyst at Standard & Poor’s.

But hiring won’t commence if demand suffers.

Among the latest signs of a slowing economy, data on Thursday showed factory activity in the mid-Atlantic states unexpectedly contracted in August for the first time since July 2009, while a separate report showed first-time claims for jobless benefits rose to a nine-month high.

In the stock market, investors have juggled robust corporate reports with the growing evidence of a slowdown in the economic recovery. The S&P 500 index is down 0.7 percent since the July 12 start of the second-quarter reporting period.

Earnings have exceeded Wall Street’s expectations, with the percentage of S&P 500 companies beating analysts’ estimates well above the 62 percent seen in a typical quarter, Thomson Reuters data showed.

“You’ve got a lot of headwinds … when you start putting those into play, that’s where some of the numbers might be a little too optimistic,” said Alan Lancz, president, Alan B. Lancz & Associates Inc., an investment advisory firm in Toledo, Ohio.

Notably, the second half of earnings season was weaker than the first. With more than 2,000 U.S. companies reporting results, more than 70 percent exceeded estimates in the first half of the second-quarter reporting period, but the total dipped to 66 percent by the end of the season, according to analysts at Bespoke Investment Group, a research firm in Harrison, New York.

S&P earnings estimates for the third quarter are likely to stay put until right before the third-quarter reporting period begins in October.

“Barring an unusual economic event … a major change in the number is unlikely” for at least the upcoming weeks, said John Butters, director of U.S. earnings at Thomson Reuters.

Profit growth helped drive the steep rebound in the S&P 500 since the index hit 12-year lows in early March 2009. The index is now up 58 percent since then.

(Reporting by Caroline Valetkevitch; Additional reporting by Chuck Mikolajczak; Editing by Kenneth Barry)

U.S. earnings optimism slipping due to economic woes