In yesterday's blog post, I pointed out that investors are on pins and needles as first-quarter earnings season shifts into high gear. So far corporate America is NOT off to a very good start!
This all sounds so familiar. In fact I pointed out in a previous post (Suspicious Earnings Forecast Adds-Up to Uncertainty for Stocks) about one month ago that Wall Street's 2008 profit expectations were a bit too lofty.
Investor sentiment is even more pessimistic now, and market action just as volatile, which makes it interesting to watch how individual stocks and sectors respond to the inevitable disappointments this quarter. Guess what? Expectations are still too lofty.
You Can Pay a Heavy Price for a Cheery Forecast
For instance, when the first quarter began just over three months ago, Wall Street’s cheery forecast called for nearly 5% profit growth for companies in the S&P 500 index.
Now, after numerous profit warnings and outright misses (like GE), Wall Street analysts expect a 12% profit decline, according to Reuters Estimates. That’s quite a reversal of fortune.
These same intrepid analysts however remain undaunted in their rosy outlook for a quick profit recovery. The Wall Street consensus now sees full-year earnings growth of 11% for the S&P 500, down only slightly from 15% growth forecast in January... yeah, right!
Let's just that say I remain very... skeptical!
As for the biggest winners and losers by sector this quarter, it’s no surprise that financials will post the most “lousy” first quarter results.
The S&P Profit Picture Driven (Lower) by Financials
According to Zacks, the financial sector of the S&P 500 will see profits plunge 67% from a year ago – the biggest sector drag on overall results. Unfortunately for the S&P 500 Index as a whole, financial sector profits have until now contributed the largest share of overall earnings to the index, as shown in the graph above.
Now financials have become the biggest drag on profits and are likely to remain so for awhile yet. At least we won't have to wait too long to find out. JP Morgan (the proud new owner of Bear Stearns) reports first-quarter results tomorrow; followed by Merrill Lynch on Thursday and Citigroup Friday! Talk about a "murderer's row"! More unexpected bad news from these guys could once again kill any chance of a market rally.
Citi is expected to post a $5.7 billion loss, with an additional $10 billion in asset write-offs! Merrill could suffer a $7 billion write off, according to analysts. Watch closely at how the market - especially the financial sector - reacts to the back-to-back reports from these industry bellwethers.
Other Sectors Facing Diminished Expectations
Beside financials, there are several other sectors that have seen estimates cut sharply too. These stocks could also be candidates for disappointment. Firms in the basic materials sector for example will see profits up just 1.4% in the first quarter. This may prove especially troubling since many materials stocks have been high-flyers and aren’t cheaply valued today.
Profits in the consumer discretionary sector are expected to crawl ahead less than 1%, while industrial firms (like GE) grow profits just 2.8%.
Not to worry... Wall Street’s fearless forecasters see full-year 2008 results rebounding in a big way for some of the most beaten-down sectors. Profits for financial firms are still estimated to grow 20% for all of 2008 leading the overall S&P 500 to healthy 15% earnings gains... but don’t bet on it!
There are still a lot of thorns hiding amid Wall Street's rosy forecasts... better take a skeptical view; and prune your expectations.
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