Profits: Ouch. It's Starting To Hurt

U.S. third-quarter earnings are off 7% from last year's level

So, how bad was it? Not apocalyptic, but Wall Street's anxiety over third-quarter results was well founded. BUSINESS WEEK's flash earnings report, based on announced profits of 130 companies, is a sign of a slowing economy: Profits are down 7% from a year ago, on an anemic 2% sales increase. Worse, the weakness that emerged in the second quarter has now spread beyond manufacturing to service companies--whose earnings had risen 20% in the second quarter, only to drop 23% in the third.

Much of that pain was concentrated in financial services, as companies counted up losses from the stumbling stock market, hedge funds, and emerging-market investments. Among the banks, profits at BankAmerica Corp. (that is, the combined NationsBank Corp. and the old BankAmerica) were down 78%, on a $519 million charge for the merger. Net income at J.P. Morgan & Co. fell 61%. At the brokerages, Merrill Lynch & Co. had a $164 million loss, on a $288 million charge for eliminating 5% of its staff. Bear, Stearns & Co.'s earnings were down 60%, while Donaldson, Lufkin & Jenrette Inc. was off 79%. Take out the banks and brokerages, and quarterly profits would have broken even.

The drop isn't all the fault of financial services. A chunk of the bad news this quarter can be attributed to General Motors Corp.'s $809 million, strike-induced loss. Take out the carmaker, and earnings would have declined only 3%.

And GM wasn't the only big name on the casualty list: Gillette was off 99%, Compaq Computer fell 78%, and DuPont lost $564 million. Furthermore, Motorola Inc. was $42 million in the red. Oil companies were hit hard, too, with profits down at Exxon (-23%), Amoco (-54%), and Texaco (-56%).

On the plus side, Microsoft Corp. paced technology companies with a stunning 154% profit leap. Apple Computer Inc. roared back from a $161 million loss to a $106 million profit. Chrysler Corp. surged past rivals with a 55% hike in earnings. And SBC Communications Inc.'s 48% earnings rise boosted the utilities-and-telecom sector by 11%.

For the fourth quarter, analysts surveyed by I/B/E/S International Inc. expect profits for the S&P 500 to be up 4.7%. Then again, at the start of the year, they predicted a 14.8% jump. Stay tuned.

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