Investors turn wary as earnings picture dims

Profits of S&P 500 companies are seen dropping 3% this quarter from a year ago, the first decline in three years

Earnings season is heating up, but investors’ feet are getting cold. Central bank-fueled gains took markets within reach of five-year highs in September, but now US stock market participants are shifting their focus back to corporate outlooks, and the picture is not pretty.

Early earnings reports have underlined those concerns, which may be exacerbated when dozens of major companies - including Dow components General Electric, Microsoft Corp and Inter-national Business Machines Corp - report next week.

“Caution is definitely the operative word as Europe and China look to continue dragging on earnings,” said Michael Loewengart, director of investment strategy at E-Trade Financial in New York. “The overall tone is so pessimistic that we may see some upside surprises, but we could still suffer considerable losses if the news is bad.”

Profits of S&P 500 companies are seen dropping three per cent this quarter from a year ago, the first decline in three years, hurt by China’s slowing growth and Europe’s debt crisis, which recently prompted the International Monetary Fund to cut its 2012 economic growth outlook.

Financial stocks will be especially in focus, with Bank of America Corp, Citigroup Inc, Goldman Sachs Group Inc and Morgan Stanley all set to report.

Results on Friday from JPMorgan Chase & Co and Wells Fargo & Co generated some caution about the group despite both reporting stronger-than-expected profits. Wells Fargo posted disappointing revenue and a bigger drop in net interest margin than had been anticipated.

Wells Fargo shares slumped 2.6 per cent to $34.25, while JPMorgan lost 1.1 per cent to $41.62 despite bullish commentary about the housing market.

“We need to see big banks doing well, and JPMorgan or Wells didn’t give us the boost we were hoping for,” said Wayne Kaufman, chief market analyst at John Thomas Financial in New York. “Citigroup is the one we’re looking for. If profits come in worse than expected there, that would make me more bearish about the economy in general.”

Fewer companies beat the Street
With only six per cent of S&P 500 companies having reported, 59 per cent of companies have topped profit expectations - less than the average beat rate of 67 per cent for the past four quarters, according to Thomson Reuters data. Half of companies have beaten on revenue, while a quarter missed profit forecasts.

“We need to see the beat rate pick up well into the 60s if we want the market to have any support,” Kaufman said.

The S&P 500 fell 2.2 per cent this week, its biggest weekly percentage drop since June, on caution about the season after a number of bellwethers cautioned on their outlooks, including Chevron Corp and Alcoa Inc.