By Caroline Valetkevitch
NEW YORK, Oct 21 (Reuters) - U.S. earnings started the
quarter on the wrong foot, and things have only gotten worse.
Expectations for the third quarter were dismal, with
forecasts for a decline in profits from a year ago. But a recent
flurry of high-profile reports has investors scowling at the
weak revenue numbers, adding to worries about the state of the
U.S. economy and the outlook for corporate America.
"The earnings season is not looking very bright," said Larry
Peruzzi, senior equity trader at Cabrera Capital Markets Inc, in
Boston.
International Business Machines, General Electric
and Microsoft fell short of revenue
expectations, creating a sour mood early in the third-quarter
reporting period.
The third quarter is among the most important for investors
and economists because it is when companies begin to give a
better picture of what the following year may look like.
IT'S RAINING NUMBERS
The pace of earnings reports will accelerate this week, with
eight Dow components and 155 S&P 500 companies scheduled to
release results. Tech heavyweight Apple Inc will be
among them.
Just 38 percent of S&P 500 companies beat expectations on
revenue in the past week, compared with 41 percent since the
start of the reporting period, and well below the 62 percent
long-term average, Thomson Reuters data showed.
On the earnings side, the data has been slightly more
upbeat: 62 percent of companies that reported last week beat
expectations versus 60.3 percent since the start of the earnings
period, and the 62 percent long-term average, the data showed.
Investors have sold off shares after weak results, and more
profit taking may be in store for stocks, given the big gains
they have seen since the start of the year, Peruzzi said.
Friday's sell-off gave Wall Street its worst day in four
months. The market's slide came on the 25th anniversary of Black
Monday, when the Dow Jones industrial average plunged
22.6 percent in its worst one-day percentage loss ever.
The S&P 500 ended the week with a gain of just 0.3 percent.
That's a modest showing when compared with its gain of 2.3
percent in the first three days alone.
For the year, the benchmark S&P 500 Index is still up 14
percent.
Much is riding on Apple, especially given the weakness in
technology earnings so far this reporting period. Besides IBM
and Microsoft, Intel and Google disappointed
Wall Street with their results last week as well. Google's big
miss came as a shock to many investors.
Apple "is certainly a bellwether, and today more than any
other stock, sets the mood for investors," said Lawrence
Creatura, portfolio manager at Federated Investors in Rochester,
New York.
Besides Apple, results are expected this week from
Caterpillar, Yahoo, United Parcel Service
and Whirlpool.
THE UGLY TRUTH
Based on results from 116 companies and estimates for the
rest, quarterly earnings of S&P 500 companies are expected to
drop 1.8 percent from a year ago - the first drop in three
years. Without Apple, that fall would be about 2.3 percent,
according to Thomson Reuters earnings analyst Greg Harrison.
Outlooks from U.S. companies have added to worries.
So far for the fourth quarter, there have been 17 negative
outlooks from companies, no positive outlooks and one in line.
That compares with 11 negative outlooks, two positive outlooks
and two in line at a comparable period for third quarter
guidance, Thomson Reuters data showed.
"Now is when the truth is revealed," Creatura said. "Now is
when management teams begin to bracket what 2013 results might
look like."
FED TO GRAB ATTENTION
Taking some of the focus away from earnings this week will
be the Federal Reserve's policy meeting on Tuesday and
Wednesday. After last month's meeting, the Fed announced its
third round of aggressive economic stimulus, causing stocks to
rally despite a slew of earnings warnings.
While investors welcomed the Fed's plan for more economic
stimulus, known as quantitative easing, the move underscored
worries that the U.S. economy may be in worse shape than feared.
Worsening macroeconomic conditions, namely sluggishness in
the U.S. economy along with a dramatic slowdown in Europe and
weakness in China, have been among the chief reasons cited by
companies in their warnings about earnings and revenue.
U.S. economic indicators to watch this week will include
new home sales for September on Wednesday and durable goods
orders for September on Thursday, followed by the first look at
third-quarter GDP on Friday, as well as the final reading for
October on consumer sentiment from the Thomson
Reuters/University of Michigan surveys.
(Wall St Week Ahead appears every Sunday. Questions or
comments on this column can be emailed to:
caroline.valetkevitch(at)thomsonreuters.com)