Wall Street frets over profits

NEW YORK -- Inside major Wall Street firms and across their trading floors, concerns about corporate earnings are getting difficult to ignore.

America's blue chip companies — big business stalwarts like Merrill Lynch & Co. and IBM Corp. — will release third-quarter results in the coming weeks. After a quarter marked by tightening credit conditions and concerns about a slowing economy, profit reports are expected to be the worst since 2001.

And early signs this past week seemed to confirm what many on Wall Street feared — that results will show no growth from the year-ago period. Investors got a pair of profit warnings from International Paper Co. and Chevron Corp., while results from General Electric Co. and aluminum producer Alcoa Inc. failed to impress.

Money managers in charge of multi-million dollar portfolios believe much more weight will be put on performance this quarter. Not only will individual results be a good indication of the health of corporate profits, but what companies say about the future will be the best indication yet about the economy.

"Right now people are flailing around trying to find out what the economy really is doing," said Kim Caughey, equity research analyst at Fort Pitt Capital Group. "I am really looking forward to getting on the conference calls that companies have with investors — that is what is going to bring us clarity."

While most economic data released is backward looking, outlooks by major companies give investors a glimpse of what might lie ahead. Some analysts believe companies are trying to get bad news out in the open, take their lumps during the third quarter and return to double-digit profit growth in the fourth quarter and beyond.

"When you're going to take a hit, take it," said Howard Silverblatt, senior index analyst at Standard & Poor's. "This shows that they are cleansing themselves and will probably get a tail wind next year."

For instance, Merrill Lynch — which reports results on Wednesday — already warned it will take a $5 billion write-down for the third quarter. Earlier this month, Citigroup Inc. said it lost $3.3 billion in the credit market turmoil, and a similar warning is expected out of rival JPMorgan Chase & Co. in the coming days.