U.S. News

Why Investors Are Nervous Even When Profits Are Good

Tara Siegel Bernard

Corporate profits have been relatively healthy so far this earnings season. So why are investors so skittish?

It's the weak outlook that companies are giving--particularly among techs--that's putting shareholders in the selling mood.

“The estimates for the first quarter are a little light, which has some people concerned that we're going to see a slowdown in the first quarter that doesn't justify these levels in the market,” Mark Pado, U.S. market strategist at Cantor Fitzgerald, told CNBC.

“Companies also appear to be even more cautious than expected with their first quarter revenue and earnings guidance,” added Fred Dickson, chief marketing strategist at D.A. Davidson & Co., in a research note. “While it’s too early to tell if this pattern will extend across the 6,000 companies reporting, over the next month, it has set a cautious tone on Wall Street.”

Stocks Get Pummeled

Apple and Intel are a case in point. Both gave disappointing earnings forecasts, and their stocks immediately got pummeled.

Of the 82 companies in the Standard & Poor's 500 Index that have reported thus far, 59% have beat analysts' expectations, 20% have matched forecasts, while 22% fell short, according to Thomson Financial.

Companies typically use the last quarter of the year to do year-end house cleaning, though it’s still unclear if most reports will be riddled with one-time charges.

Right now, all eyes are on the technology, which is faring a bit worse than anticipated.
Earnings for 2006 were expected to be largely flat to marginally higher than the prior year, but companies promised a 23% gain in profits for 2007, Silverblatt said.

“So far, technology’s fourth quarter earnings have been disappointing, which is not that much of a surprise since companies may want to pack in as much of a bang into their 2007 numbers as they can,” Silverblatt said.  “Unfortunately, the guidance has also been slightly off which has put pressure on stock prices.” 

March Will Be Critical

Silverblatt said March will be a critical period for the sector because companies should provide more guidance for the first quarter, and should give investors a better indication of what’s likely for the year ahead.

“We still expect the overall (earnings) gain to be under 10%, which would break the 18 consecutive quarters of double-digit gains,” said Howard Silverblatt, senior index analyst at S&P. Fourth-quarter operating profits at Standard & Poor's 500 companies are expected to rise 9.4% from a year ago, to $199 billion.

So far, financials, boosted by the strong results at the brokerage houses, are doing well, though banking appears to be mixed, Silverblatt explained. Energy is yet to report, but earnings are expected to lower due to lower oil prices. 

“The reality is we are going into a period where earnings growth will be slowing down,” Darin Richards, chief investment officer at AKT Wealth Advisors, told CNBC. “The market just has to find a way to digest that appropriately.”