Markets: Can Earnings Move Them Off Bad Jobs Report?

The markets will quickly move from the debacle of the jobs reportto earnings, and here the picture is a bit precarious as well.

Fourth quarter earnings estimates have been coming down fast. We're expecting earnings for the S&P 500 as a whole to be down 9.5 percent (estimates from Thomson). But at the beginning of the quarter (Oct. 1) analysts were expecting earnings to be UP 11.9 percent. It's true that estimates typically come down a bit as the quarter wears on, but this is a remarkable drop and is the clearest indicator the Street has been stunned by developments in financials.

In fact, if you look under the hood, you'll see that the drop is entirely due to financials; that sector will see a stunning 66 percent drop in earnings. If you remove financials, the S&P will report earnings up 12 percent, exactly in line with the 11.9 percent estimate at the beginning of the quarter.

In fact, energy and technology sectors have had INCREASES in total earnings estimates; the other sectors have been essentially unchanged.

First Quarter 2008. Similar pattern: expecting earnings for the S&P 500 to be up 5.7 percent (Oct. 1 was expected up 10.6 percent), but you can bet that will be coming down.

Here's another trend: estimates for the consumer discretionary sector (autos, retail, housing) are coming down fast: it's now estimated to be up 8 percent (from 18 percent Oct. 1). That will be coming down as well.

Financials of course will be weak (down 11 percent). But estimates for earnings in the energy sector are going up (again!), and everything else is flat.

So the worry now is that consumer discretionary (retail, housing, autos) estimates will come down, and spending on capital expenditures will slow down as well.

BOTTOM LINE: IT'S ALL DOWN TO THE GLOBAL ECONOMY. The key to the other sectors holding up (tech, materials, industrials) is the global economy.

If China and India start to deteriorate, or even if the dollar should rally dramatically (unlikely here), then estimates are up for grabs everywhere.

Questions? Comments?