Oct. 12 (Bloomberg) -- Earnings pessimism among U.S. chief executive officers is climbing to levels last seen when the Standard & Poor’s 500 Index was mired in bear markets.
Over the last four weeks, the ratio of companies saying profits will trail estimates compared with those saying they will exceed them climbed to 4.3, according to 69 earnings previews compiled by Bloomberg. The rate matches peaks reached in February 2009 and October 2001, the data show.
Warnings that estimates are too high by companies from Intel Corp. to Caterpillar Inc. came even as analysts lowered predictions for third-quarter income growth by 10 percentage points this year. Bears say the 0.9 percent decrease in profits predicted by analysts, the first quarterly retreat in three years, will limit gains in equities. Bulls say stocks can keep rallying as companies have an easier time beating forecasts.
“The economy is fairly weak, probably weaker than most people realized,” William Frels, chief executive officer at St. Paul, Minnesota-based Mairs & Power Inc., which manages about $4.5 billion, said in a phone interview on Oct. 10. “I’d not be a bit surprised if earnings come in under expectations. The question is how much under.”
More companies are cutting estimates after U.S. gross domestic product expanded at the slowest post-recession rate since World War II. The International Monetary Fund reduced its global growth forecasts this week as the euro area’s debt crisis intensifies. The Washington-based lender warned of even slower expansion unless officials in the U.S. and Europe address threats to their economies.
The S&P 500 has surged 111 percent from a 12-year low in March 2009 amid better-than-expected earnings and unprecedented measures from the Federal Reserve to stimulate economic growth. The benchmark index for U.S. equities is up 14 percent this year, poised for the biggest annual gain since 2009.
The rally pushed the gauge’s price-to-earnings ratio to 14.5, up from 13.7 at the end of 2011 and compared with an average income multiple of 16.4 over the last five decades, based on data tracked by Bloomberg.
“Further equity gains are now more reliant upon earnings growth and not a re-pricing of valuations,” Christopher Harvey, director of investment strategy with Weeden & Co. in Greenwich, Connecticut, wrote in a note yesterday. “EPS growth is starting to flatten out. If EPS growth does peak, equity gains will likely become harder to achieve.”
The S&P 500 slipped 0.3 percent to 1,428.59 at 4 p.m. in New York today as a reduction in sales forecast from Advanced Micro Devices Inc. and disappointing profit margins at Wells Fargo & Co. overshadowed an unexpected increase in consumer confidence.
Intel, the world’s largest semiconductor maker, last month reduced its third-quarter sales forecast, citing declining demand for personal computers from corporate customers in a weakening economy. The Santa Clara, California-based company will probably say on Oct. 16 that sales during the July-to-September period fell 7 percent to $13.2 billion, according to the average analyst estimate in a Bloomberg survey.
Caterpillar in Peoria, Illinois, cut its forecast for 2015 earnings on Sept. 24 after commodity producers reduced capital expenditures. The world’s biggest construction and mining equipment maker is due to announce results on Oct. 22.
“We see fairly anemic and modest growth through 2015,” Caterpillar Chairman and Chief Executive Officer Doug Oberhelman said in presentation to analysts that day at the MINExpo industry conference in Las Vegas.
FedEx Corp., the operator of the world’s biggest cargo airline, lowered its annual profit outlook on Sept. 18 after a weakening economy prompted shippers in the U.S. and overseas to switch to cheaper delivery. The Memphis, Tennessee-based company, viewed as an economic barometer, this week trimmed its forecast for 2012 U.S. economic growth to 2.1 percent from 2.2 percent.
Bearish sentiment among executives proved no hurdle to stock gains during the last earnings season. While the ratio of negative to positive guidance jumped to 3.6 in June, the S&P 500 climbed 4 percent that month and rose in each of the following three months.
Executives have been conservative in providing guidance before the presidential election and automatic deficit cuts that could go into effect starting in January, according to E. William Stone at PNC Wealth Management. Unless a government compromise is reached this year, $607 billion of automatic spending reductions and tax increases will be triggered.
“Nobody wants to be caught on the wrong side of saying the company is going to do great and then things fall apart,” Stone, chief investment strategist at PNC in Philadelphia, said in a phone interview yesterday. His firm manages about $112 billion. “The bar is set low enough that I don’t think it imperils the bull market in terms of the earnings picture. For the third quarter, there is a good chance that companies could come out and ahead.”
The 0.9 percent decrease forecast by analysts compares with the gain of 9.3 percent they projected at the beginning of the year and would be the first profit decline since 2009.
Among the 35 S&P 500 companies that have reported so far, 69 percent beat analysts’ estimates, data compiled by Bloomberg show. Profits have exceeded their forecasts by an average 7.6 percent, more than double the rate for last quarter.
The S&P 500 has lost 0.9 percent since Alcoa Inc. unofficially started the earnings season with release of its third-quarter numbers on Oct. 9. The largest U.S. aluminum producer slumped 4.6 percent the next day after cutting its forecast for global consumption of the metal by 1 percentage point on slowing Chinese demand.
“It’s no secret that the economy is slowing down and that’s showing up at a lot of companies,” Paul Hogan, who helps manage $1.6 billion at Fenimore Asset Management Inc. in Cobleskill, New York, said by phone on Oct. 10. “To the extent that we see more of these preannouncements, maybe there is going to be a little bit of a pause coming.”
To contact the reporter on this story: Lu Wang in New York at email@example.com
To contact the editor responsible for this story: Lynn Thomasson at firstname.lastname@example.org