Vital Signs: More Bad Earnings News to Come?

On deck: homebuilders' survey, housing starts, FHFA home price index, and a slew of fourth-quarter earnings reports

The fourth-quarter earnings season kicks into gear this week, as 56 S&P 500 companies plan to report their results. As usual, Alcoa (AA) started things off, this time with surprising news of a 28 cents per share loss on Jan. 12. Even after warning Wall Street the previous week, the company’s results still came in almost three times worse than the Street’s expectation. Alcoa’s negative surprise may well be a harbinger of more bad news to come.

As of Jan. 9, analysts expected earnings per share for the S&P 500 companies to fall 15.1% from a year ago, according to the tracking by Thomson Reuters. Analysts have already downgraded their expectations, but if the third-quarter pattern is any guide—and it probably is—projections are still not pessimistic enough. Just before Alcoa’s kick-off to third-quarter reports, analysts expected earnings to decline 4.8%. The actual drop turned out to be 18%.

What’s especially worrisome about earnings projections for this quarter and next is the growing breadth of weakness in the economy. Already, Thomson Reuters reports the fourth-quarter ratio of negative-to-positive pre-announcements stands at 4.1, nearly double the ratio at the same point in the third-quarter earnings season.

Bad news on profits is no longer just a financial-sector story. In the third quarter, excluding the finance sector, earnings were up about 8%. This quarter, financials are still extremely weak, but earnings in the materials sector are expected to be down 69%, with the consumer discretionary industries off 56%. Earnings declines of between 10% and 20% are currently projected for industrials, information technology, and telecommunication services. Right now, analysts expect only health care, consumer staples, and utilities to post gains—in the single-digit range. Even if analysts current projections are on target, seven of the ten major sectors in the S&P 500 are expected to report year-over-year declines. That would be the most since the 2001 recession.

The problem is not just weak revenue growth. There are clear signs that profit margins are under extreme pressure. The most evident sign of that is the sharply accelerated pace of job cuts in recent months. Employee compensation is generally about three-fourths of all production costs. Margins are also getting squeezed as the drop off in both domestic and foreign demand saps pricing power.

The way investors have beat down stock prices in recent months, they appear to be saying current analysts' estimates for 2009 are too optimistic. Analysts, always a rosy breed, project earnings per share of $76.07 for the S&P 500, about even with all of 2008. However, that would imply a 33% jump from the fourth quarter of 2008 to the fourth quarter of 2009.

The real question is this: Have investors already factored a sufficiently weak earnings outlook into stock prices, or will more unexpectedly bad news on profits cause them to beat down shares even further? The answer lies in prospects for a return to at least modest economic growth in the second half. Without that, even today’s low valuations will be hard to justify.

Note that U.S. markets will be closed on Monday, Jan. 19 in observance of Martin Luther King Day. Here's the weekly economic calendar, from Action Economics.

Top reports
Top Reports Date Time For Median Estimate Last Period
Housing Starts (Millions) Thursday, Jan. 15 8:30 a.m. December 0.625 0.625
Other Reports and Events
Reports/Events Date Time For
ICSC-UBS Store Sales Tuesday, Jan. 20 7:45 a.m. Jan. 11-17
Johnson Redbook Weekly Store Sales Tuesday, Jan. 20 8:55 a.m. Jan. 11-17
Mortgage Applications Wednesday, Jan. 21 7:00 a.m. Jan. 11-17
NAHB Home Builders Survey Wednesday, Jan. 21 1:00 p.m. January
Initial Unemployment Claims Wednesday, Jan. 21 8:30 a.m. Jan. 11-17
FHFA Home Price Index Thursday, Jan. 22 10:00 a.m. November
Earnings Calendar
Company (symbol) Report Date
Parker Hannifin (PH) Tuesday, Jan. 20
Forest Laboratories (FRX) Tuesday, Jan. 20
Regions Financial (RF) Tuesday, Jan. 20
Precision Castparts (PCP) Tuesday, Jan. 20
Fastenal (FAST) Tuesday, Jan. 20
IBM (IBM) Tuesday, Jan. 20
CSX (CSX) Tuesday, Jan. 20
Bank of America (BAC) Tuesday, Jan. 20
State Street (STT) Tuesday, Jan. 20
Johnson & Johnson (JNJ) Tuesday, Jan. 20
Abbott Laboratories (ABT) Wednesday, Jan. 21
US Bancorp (USB) Wednesday, Jan. 21
Northern Trust (NTRS) Wednesday, Jan. 21
Coach (COH) Wednesday, Jan. 21
Air Products & Chemicals (APD) Wednesday, Jan. 21
United Technologies (UTX) Wednesday, Jan. 21
Progressive (PGR) Wednesday, Jan. 21
Burlington Northern Santa Fe (BNI) Wednesday, Jan. 21
Noble (NE) Wednesday, Jan. 21
eBay (EBAY) Wednesday, Jan. 21
Hudson City Bancorp (HCBK) Wednesday, Jan. 21
Massey Energy (MEE) Wednesday, Jan. 21
Apple (AAPL) Wednesday, Jan. 21
Allegheny Technologies (ATI) Wednesday, Jan. 21
Huntington Bancshares (HBAN) Thursday, Jan. 22
SunTrust Banks (STI) Thursday, Jan. 22
BB&T (BBT) Thursday, Jan. 22
UnitedHealth Group (UNH) Thursday, Jan. 22
CIT Group (CIT) Thursday, Jan. 22
Janus Capital Group (JNS) Thursday, Jan. 22
Comerica (CMA) Thursday, Jan. 22
M&T Bank (MTB) Thursday, Jan. 22
Sherwin-Williams (SHW) Thursday, Jan. 22
AmerisourceBergen (ABC) Thursday, Jan. 22
Fifth Third Bancorp (FITB) Thursday, Jan. 22
Citigroup (C) Thursday, Jan. 22
Bank of New York Mellon (BK) Thursday, Jan. 22
Capital One Financial (COF) Thursday, Jan. 22
Advanced Micro Devices (AMD) Thursday, Jan. 22
People's United Financial (PBCT) Thursday, Jan. 22
Federated Investors (FII) Thursday, Jan. 22
Exelon (EXC) Thursday, Jan. 22
Southwest Airlines (LUV) Thursday, Jan. 22
Keycorp (KEY) Thursday, Jan. 22
Union Pacific (UNP) Thursday, Jan. 22
MEMC Electronic Materials (WFR) Thursday, Jan. 22
International Game Technology (IGT) Thursday, Jan. 22
Baxter International (BAX) Thursday, Jan. 22
Google (GOOG) Thursday, Jan. 22
Intuitive Surgical (ISRG) Thursday, Jan. 22
Meredith (MDP) Thursday, Jan. 22
Lockheed Martin (LMT) Thursday, Jan. 22
Schlumberger (SLB) Friday, Jan. 23
Harley-Davidson (HOG) Friday, Jan. 23
General Electric (GE) Friday, Jan. 23
Xerox (XRX) Friday, Jan. 23
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