Earnings predicted to be crappy again

Despite the better-than-expected jobs numbers last week, most analysts are predicting an across the board drop in corporate earnings this quarter.

From a Bloomberg story:

Third-quarter profits and sales for the Standard & Poor’s 500 Index (SPX) probably fell in unison for the first time in three years, according to analysts’ estimates compiled by Bloomberg. Per-share earnings may have dropped 1.7 percent on average after they were little changed in the second quarter. Sales may have slipped 0.6 percent, the data show.

While most companies plan to keep a lid on spending, lower expenses aren’t leading to the same kinds of increases they reported earlier this year. Hewlett-Packard (HPQ) Co., the world’s largest personal-computer maker, already forecast full-year profit that trailed analysts’ estimates, FedEx Corp. (FDX)cut its annual earnings forecast and Intel Corp. (INTC)projected lower third- quarter sales, with all three citing softening demand.

“A lot of the earnings growth that we’ve seen has been related to cost reductions,” said Peter Jankovskis, co-chief investment officer for Oakbrook Investments in Lisle, Illinois, which manages more than $3 billion. “Now many of those cost reduction efforts have run their course. Without revenue growth, there is no room for profit to expand further.”

Alcoa, which is the start of earnings season, is expected to post a 13 percent drop in sales, the largest in three years, according to Bloomberg. While most stock pickers generally view Alcoa as a bell-weather for performance, as goes Alcoa isn’t always the way of corporations. According to MarketWatch:

Recent history suggests that what’s been a good or bad quarter for Alcoa hasn’t exactly impacted everybody else.

Going back to 2009, the times Alcoa missed Wall Street’s earnings forecast, 72.4% of the companies in the S&P 500 went on to beat the consensus profit estimate, FactSet data shows.

Let’s go 10 years. The S&P 500 has gone up in value 15 of the 19 quarters Alcoa beat Wall Street’s profit estimate, according to FactSet. Meanwhile, in the 21 quarters Alcoa missed consensus, the S&P 500 only went down a mere 0.6% over the next three months.

Yet stocks dropped Monday in anticipation of weak results and analysts’ predictions that would be true across the companies in the S&P 500.

According to the Financial Times (via Politico’s Morning Money):

The slowdown in the global economy and anaemic US recovery is expected to result in one of the worst US quarterly earnings seasons since late 2009. Analysts expect earnings for the period ended September to decline, the first negative result after 11 consecutive quarters of gains. … Wall Street analysts expect third-quarter earnings per share for S&P 500 companies will fall 2.7 per cent versus the same quarter a year ago, according to FactSet.

“Just three months ago analysts had forecast growth of 1.9 per cent. In the past three months, warnings from large companies … Jeff Kleintop, chief market strategist at LPL Financial, said: ‘We expect corporate profits will be negative and revenues soft, as the global slowdown and below average economic growth in the US has affected companies. However, downbeat earnings expectations are yet to weigh on the broad market with the S&P 500 up more than 16 per cent so far this year.”

And if the picture isn’t confusing enough, the Wall Street Journal’s David Reilly points out the difficult issue of corporate profits sitting overseas in his Heard on the Street column. He writes:

Companies in the S&P 500 had $1.5 trillion parked outside the U.S. for which they hadn’t accrued tax expense in 2011, more than double the amount five years earlier, according to the Analyst’s Accounting Observer. Technology companies, such as Apple, Microsoft and Cisco, account for nearly a quarter of this money, while health-care companies make up about a fifth.

Shareholders may be pleased that those profits haven’t had a tax bite taken from them—particularly as there is always the chance that the U.S. declares another tax amnesty allowing companies to repatriate them. But there are downsides, including a lack of disclosure that makes it hard to monitor the impact on overall earnings.

When companies park cash overseas indefinitely, they are essentially saying there is a pool of profit that is out of the reach of shareholders. This also means part of a company’s “free” cash flow may be anything but. So these profits essentially become “look, but don’t touch earnings,” Jack Ciesielski, editor of the Observer, argued late last month at a Senate hearing examining offshore profit shifting and the U.S. tax code.

All of this is just another way to say the economic outlook and health of companies remains a bit of a mystery to those analyzing the market. Most analysts are expecting profits to drop since companies have cut expenses about as much as possible and continue to sit on cash reserves. The lack of investment could signal a run of slow to no growth in coming quarters. If you haven’t invented anything new or put any money into research, it’s hard to increase business. And that’s not good for anyone.

Instead of just paying attention to numbers, it would be informative to see the business media also include investment outlook when reporting earnings this quarter. That way, we’ll know how long we might have to put up with slow growth.