The Corporate Profit Engine May Be Slowing

For the first time in more than a year, Wall Street analysts cut their forecasts for Standard & Poor's 500-stock index earnings during the course of a quarter, casting a shadow over the stock market outlook. Analysts reduced their estimates for S&P 500 companies' combined 2011 profit to $95.21 a share as of Sept. 30, down from an August high of $96.16 and $95.50 on June 30, according to more than 8,500 forecasts tracked by Bloomberg. The last time analysts' earnings estimates fell during a quarter was in the three months ended June 2009. The figure has since rebounded to $95.97 a share.

Even the lower level would represent a rise of 14 percent from 2010 and a record for U.S. corporate profits. Some Wall Street professionals think the reduced estimates are overly optimistic. "You need pretty fancy GDP numbers to get to $95 a share in earnings next year," says Robert Doll, vice-chairman of New York-based BlackRock (BLK), which oversees $3.2 trillion. "Our view is that they're still a little too high, and that nobody believes them."

A slowdown may show up as companies report results for July through September. Analysts expect companies in the S&P 500 to report profit increases of 23 percent on average for the third quarter, according to forecasts tracked by Bloomberg. That would be about half the 49 percent growth during the second quarter and the 52 percent increase from January through March.

The reduction in earnings expectations—which came as the S&P 500 index rose 8.8 percent last month, the largest September advance since 1939—may presage lower stock prices. "If analysts are lowering estimates on a broad basis, the market should reflect that," says Wasif Latif, vice-president of equity investments at USAA in San Antonio, which oversees $45 billion.

Yet some money managers are not concerned. Michael Levine, who helps oversee $165 billion at OppenheimerFunds, says the outlook for lower earnings is already reflected in stock prices. Based on the most recent forecasts, the S&P 500 is valued at 12 times estimated income for 2011, according to data compiled by Bloomberg. "Equities are cheap," says Levine. Investors "are assuming there's a slow but gradual recovery," he adds. "As long as that's the message, the markets will be fine."

The bottom line: Wall Street forecasters have knocked down their forecasts for corporate profits for the first time in more than a year.

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