U.S. News

Investors Await Slowdown in Profit Growth

Lowered stock

Companies might be raking in another quarter of record earnings, but some investors are already bracing for when the profit bonanza will end.

It's halfway through the third-quarter earnings season, with 319 of the Standard & Poor's 500 companieshaving reported, and by most accounts it's been a whopper. Earnings are coming in 16.1 percent higher in the quarter than they were a year ago, marking the seventh-consecutive quarter of double-digit earnings growth, S&P Capital IQ says.

Yet, rather than rejoicing the profit windfall, analysts and companies are predicting less ebullient times ahead. Caution about future earnings comes amid a powerful rally on Wall Street, which has pushed the S&P 500 index up 16.9 percent from its low this year on Oct. 3. "It's interesting to see the market go up so much, but the future estimates for profit have been coming down," says John Butters of FactSet Research.

Now that concern over an imminent financial crisis in Europe is fading, deciphering clues from third-quarter earnings season will return to the forefront as investors refocus on the prospects of U.S. companies. Investors are paying close attention to how:

  • Companies are setting the bar low. Recent high-profile disappointments such as Apple , Netflix and Amazon are the exceptions, says David Sowerby of Loomis Sayles. Of the companies that have reported, 67 percent have topped estimates and just 22 percent have missed, which is roughly in line with recent quarters. "Profits are healthy," Sowerby says. The issue is with stocks "that are priced for sainthood."

Sharply cut forecasts have helped reduce disappointments. Analysts cut their forecast for third-quarter growth from 16.4 percent at the quarter's start to 11.5 percent once reporting began, Butters says. "Low expectations are surmounted," says Doug Sandler of Riverfront Investment Group.

  • The profit outlook is darkening. Analysts have slashed their forecast for fourth-quarter earnings growth in the past few weeks from 20.2% to 16.7%, Butters says. That's the steepest drop during the first month of a quarter since the second quarter of 2009. Estimates for next year are being cut, too.
  • The global economy is a factor. Investors continue to wonder how slowing growth in emerging nations and troubles in Europe will affect U.S. firms, says Dirk van Dijk of Zacks Investment Research. There's also concern on how tax changes next year might hurt growth.

The greater frequency of warnings, though, might simply be a way for companies to make it easier for them to top estimates later, Sandler says. "It's just setting the bar low," he says. "We're not actually seeing a reason for concern."

This story first appeared in USA Today.