Steep losses in the financial sector are expected to weigh heavily on corporate earnings in the fourth quarter. But outside that troubled sector, the news is much more upbeat.
Except for materials, every sector will post increased profits--with technology, energy and healthcare showing double-digit gains.
Still, the freefall among financials is likely to overshadow those results. And investors will be looking closely for clues about whether the troubles facing financials are spreading to other sectors.
According to Thomson Financial, analysts are predicting that overall earnings in Standard & Poor’s 500 Index companies to fall 9.5 percent in the fourth quarter from a year ago. Just three months ago, these analysts had called for an earnings increase of 11.5 percent from the fourth quarter of 2006, said Thomson Financial analyst John Butters.
The culprit is billions of dollars in charges to write down bad bets in the mortgage market that analysts expect are on the way.
However, if one were to exclude financials from the tally, the earnings picture would be a good deal brighter. On this basis, estimates would call for an increase of 12 percent, which is in-line with forecasts issued in early October.
Citigroup First to Report
Earnings reports from the financial sector will begin on Jan. 15 with a results from Citigroup. As reported by CNBC, that release could include an announcement of layoffs at the firm of between 5 percent and 10 percent of the company's 327,000-person workforce.
Citigroup, Bear Stearns and other Wall Street banks have been reeling from the spillover effects of a downturn in the housing market, which sparked trouble in the subprime mortgage market and put a crunch on credit.
As a result of these huge losses, financial firms, which had been predicted in early October to see fourth-quarter earnings rise 7 percent, are now expected to post a decline of 66 percent in the latest period.
The largest writedowns are expected to come from Citigroup, Morgan Stanley, Merrill Lynch and Banc of America, Butters said.
Materials Expected To Fall
In the materials sector, earnings are expected to shrink by 8 percent, is being dragged down by weakness among the steel companies.
Aluminum producer Alcoa, which is among those stocks in the materials sector, kicks off the earnings season on Wednesday. Shares of the Dow component were trading lower on Monday on talk that the company may fall short of earnings estimates.
Credit Suisse lowered its estimate for Alcoa on Monday, citing lower aluminum prices, foreign exchange rates, and higher energy prices. The firm expects the company to earn 38 cents a share in the fourth quarter. Previously, it estimated earnings would be 65 cents a share.
As investors chart their course over the next few weeks, they will be looking to see what, if any, spillover has occurred from the credit crisis.
This question became even more urgent on Friday, when the latest report from the Department of Labor showed unemployment ticked up to 5.0 percent. Until now, many were holding on to the hope that a robust labor market would help contain the weakness in the housing and financial sectors and allow the U.S. economy to continue rolling along.
Signs of Slowdown
However, there have been growing signs of an economic slowdown. Consumer spending during the holidays appears to have grown more slowly than in recent years. In addition, recent manufacturing reports have shown signs of weakness.
“This would be a very risky time to be making sector overweight bets,” said Richard Cripps, managing director of portfolio strategy at Stifel Nicolaus Capital Markets.
According to Cripps, many investors already have acknowledged the expectations for fourth-quarter earnings, but are waiting to see what the companies have to say about 2008. Investors want to know whether they have been cautious enough and earnings season could become a tipping point, he said.
Already there are signs that expectations for this year’s earnings are being tempered.
Cripps noted that estimates for some consumer discretionary companies are already being reduced for this year.
Best Buy Gets Hit
Electronics retailerBest Buyis one company that may see its earnings estimates lowered. On Monday, Best Buy shares were trading lower after the stock was downgraded to "underperform" by Bear Stearns.
Bear Stearns analyst Christopher Horvers said it's "a bad time to be selling big ticket, discretionary items."
Horvers expects factory sales of electronics to be cut in half this year and profit margins to become more narrow. This trend will favor discounters.
Elsewhere in the retail sector, home-furnishing retailer Bed Bath & Beyond said its third-quarter net income fell 3 percent, but it lowered its earnings forecast for the year.
Investors are worried they may see more of this, according to Steven Goldman, chief market strategist at Weedon & Co.
"There’s a great deal of caution," Goldman said. "...(Investors) are looking for more anecdotal evidence, because usually by the time it comes, it is often too late."
Tech to Post Largest Gains
The pressure is likely to be particularly keen for the technology sector, which is expected to be the sector posting the strongest earnings growth in the fourth quarter.
According to Thomson, tech earnings are estimated to rise 22 percent from the fourth quarter of 2006. Within the sector, information technology providers, will be the brightest spot.
Microsoft is expected to be one of the strongest performers. The company, which is scheduled to report its results on Jan. 24, is expected to report earnings of 46 cents a share, according to Thomson.
Microsoft shares surged 19 percent last year, which was the stock’s best calendar-year performance since 2001.
In the energy sector, estimates have actually been on the rise. Analysts are expecting a strong quarter, fueled by rising oil prices. According to Thomson, energy company earnings may be up some 19 percent from the prior year.
Meanwhile, healthcare earnings are expected to rise 15 percent from last year. Within healthcare, expect pharmaceutical companies such as Merck to fare the best.
Merck, which reports its earnings the week of Jan. 28, is expected to earn 73 cents a share, up from 50 cents a share, in the year-ago period.
Christina Cheddar Berk is a News Editor at CNBC.com. She can be reached at christina.cheddar-berk@nbcuni.com.
