Another Not-So-Hot Earnings Season Comes to a Close

The vast majority of U.S. public companies have announced earnings for the first quarter of 2008, with just a few high-profile companies – such as retailer Wal-Mart (WMT) yet to report. With most of the numbers in, the results still don’t look pretty.

Overall, S&P 500 profits sank nearly 13% from a year ago. That’s quite a negative reversal of fortune, especially considering that back in January when the first quarter began, analysts were looking for an earning rebound from dismal fourth quarter results. That didn’t happen.

Once again the financial sector is largely to blame, with earnings plunging -67% in the quarter. It’s hard to believe, but that was even worse than analysts expected (-59%). This indicates that Wall Street’s rosy forecasts still haven’t caught up with reality.

There were a few bright spots however. Earnings in the technology sector (which I’m bullish on right now) rose 22% as did energy sector profits – the two strongest groups. Telecom sector shares surprised on the upside with a profit gain of nearly 11% vs. expectations of just 1.5% growth. Basic materials and consumer staples also performed well compared to forecasts.

According to some analysis I’ve read, if you exclude financials, first-quarter earnings rose 11% in the quarter over a year ago. Of course, you can’t really exclude financials, since this sector has a nearly 20% weighting in the S&P 500 Index. This reminds me of the tech-wreck early this decade when it became convenient for Wall Street to “exclude” plunging profits in the tech sector from the calculation.

The problem was that eventually other sectors caught up with the falling profits in the tech sector. Could 2008 be a repeat? Another troubling indicator is the fact that analyst estimates for the rest of this year still look too rosy. When earnings expectations are constantly being cut, it makes for a difficult environment for stocks.

This same trend is playing out – to a lesser degree so far – with earnings reports in Europe. Asian companies by contrast have continued to report very strong profit growth by and large, including the financial sector.

This week I’ll be traveling to Panama for the Sovereign Society’s Total Wealth Symposium. I’ll be eager to catch up with the European and Asian analysts who will be attending this conference. Stay tuned.