Gloomy financial outlook drags profit predictions down
NEW YORK -- The deepening recession is making it harder for companies to make money, prompting analysts to slash profit outlooks and investors to dial down their early-year optimism.
Profit woes once centered mostly in the financial and consumer sectors have spread to virtually every corner of the economy. With jobs vanishing and pinched consumers shopping less, CEOs running businesses that sell aluminum, computer chips, movies and all types of consumer goods are ratcheting down profit expectations. They also are offering little insight on when business will pick up.
That's fanning fears that the economic and profit recoveries will take longer than expected. Stocks typically turn up in advance of a recovery. "The question is, when do we get the rebound?" says John Butters, director of U.S. earnings at Thomson Reuters.
Pessimism about eroding economic data is clashing with optimism about President-elect Barack Obama's promised stimulus package.
The bleak outlook, which was reinforced by 524,000 job losses in December — the second-consecutive month that more than half a million people got pink slips — is spooking investors. An early-year rally has fizzled, with stocks falling the past three sessions, erasing a 3% gain. The Dow Jones industrials closed Friday at 8599, leaving it down 2% in 2009.
Job losses are causing a negative feedback loop, says Jack Ablin, chief investment officer at Harris Private Bank. "When jobs disappear, you lose spending and you lose profits, and then you lose more jobs. It feeds on itself," he says. Signs of the gloom:
•Rising warnings. The number of Standard & Poor's 500 company reports saying that profits will be worse for the final quarter of 2008 are outpacing positive ones by more than 4-to-1, double the long-term average, Thomson Reuters says. Earnings reporting season for the final quarter of 2008 starts this week with aluminum maker Alcoa stating results today.
•Contracting projections. As recently as Oct. 1, analysts, who have a reputation for erring on the optimistic side, thought profits would turn positive in the just-completed quarter and were expecting profit growth of 46.7% for the S&P 500. As of Friday, they were expecting a drop of 15.1%. A big chunk of the lower forecast has come in 2009, with expectations falling from a drop of 1.2% on Jan. 1.
