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More Companies Warn About Earnings

In a time of year when it's all about cheer, more companies are becoming bad news bears.

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A rash of companies have been coming forward with disturbing news that their earnings in the coming quarter or quarters will be a letdown. The latest such revelation came Wednesday from children's book publisher Scholastic, which said earnings in its current fiscal year ended in May would be a third below its previous forecast. Shares fell 18 percent to $26.05 Wednesday.

Such bad news continues to pile up, with similar warnings coming mainly from large technology companies such as Hewlett-Packard, Agilent Technology, Applied Materials, Intuit and Autodesk, says John Butters at FactSet.

Such a stack of warnings is alarming, since many expectations had been that the ongoing fourth quarter would be when earnings growth reaccelerated after a lackluster showing in the third, says Sheraz Mian of Zacks Investment Research. "Earnings were supposed to ramp up in the fourth quarter," he says. "I'm skeptical those expectations will hold."

The severity of earnings projections downgrades is catching investors' attention due to the:

Magnitude. The warnings are so significant, they're already starting to erode earnings growth expectations for the fourth quarter. Starting the year, analysts expected earnings to grow by more than 10 percent in the fourth quarter, Butters says. That expectation fell to 9 percent on Sept. 30. But since analysts have been barraged by warnings, they now peg fourth-quarter earnings growth at a subdued 4.1 percent.

Critical areas. Most of the warnings are coming from the materials, technology and industrial sectors. The cuts from technology companies are particularly startling, since the sector had been a driving factor for growth and stock price increases this year. Of the 30 tech companies to give guidance, 27, or 90 percent, have lowered their outlook, Butters says. That's well above the 56 percent of tech companies that typically lower their guidance.

Negative attention on 2013. Investors are still expecting companies in the S&P 500 to report 10.2 percent growth in 2013. But as the fourth quarter is looking increasingly slow, that puts next year's earnings into doubt, too, says Charles Crane of Douglass Winthrop Advisors.

If there's a bright side to all this negative news it's that the warnings have made stocks more reasonably priced just as they go into a time of the year the market tends to do best, says Ryan Detrick of Schaeffer's Investment Research. "Expectations were too high for the quarter ... and the economy isn't doing great," he says. "But expectations for the stock market are a little too low."

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