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Earnings Cliff Ahead? Profit Outlooks Are 90% Negative

Earnings conference calls are beginning to resemble crisis hotlines as corporate executives slash profit forecasts because of fears of higher taxes, a recession in Europe and slowing economy in China.

Steven Puetzer | Getty Images

Of the 20 companies in the S&P 500 that have provided guidance for the fourth quarter during the current earnings reporting season, 18 have slashed their forecasts, according to Goldman Sachs.

That's a 90 percent negative run rate that many investors and analysts have never seen before.

"Although guidance tends to be downbeat, this is especially negative," wrote Goldman's David Kostin, in a note to clients over the weekend. The strategist sees this negativity leading to a 14 percent drop in the S&P 500 this quarter.

Monday, Caterpillar was the latest company to issue a negative forecast for this quarter, along with 2013, with the CEO citing all this uncertainty and a build in inventories.

(Read More: Caterpillar Guidance 'Flat-Out Wrong,' Weiss Says)

"Companies are taking the opportunity to lower the bar," said Mike Murphy of Rosecliff Capital. "All have one eye on the fiscal cliff, so might as well bring expectations down in case we go over the cliff."

The most discussed topic on earnings conference calls is in fact the year-end "fiscal cliff," when the Bush tax cuts are set to expire and mandatory spending cuts go into effect, barring any action from a lame-duck Congress. Executives fear this may occur whether or not President Barack Obama retains office or Mitt Romney unseats him.

(Read More: Goldman Set for Gains, but Mind That 'Cliff')

When speaking of demand from truck companies on the conference call, Alcoa CEO Klaus Kleinfeld said, "messages like fiscal cliff, euro news, China … all of that influences that sentiment, and I guess that that makes them push their orders out."

(Read More: Romney Leads Obama in Latest Gallup Poll)

"We're not assuming that Europe gets any better," said GE's Jeff Immelt on his company's call. "We're kind of looking at 2013 being kind of like 2012 with the big variable being the fiscal cliff and we're ready if it doesn't go through."

Despite these negative forecasts, the S&P 500 is down less than 1 percent over the last five days and is still up more than 13 percent on the year, leaving many investors scratching their heads.

(Read More: What Wall Street Thinks of Goldman Tell-All Book)

"Policy has trumped weak fundamentals since 2009," said Brian Kelly of Shelter Harbor Capital. "If the market cannot rally with multiple central bank meetings this week, then we are at risk of then entire process reversing."

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