Analysis: U.S. corporate earnings point to further gloom

Fri Aug 17, 2012 4:47pm EDT
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By Caroline Valetkevitch

NEW YORK (Reuters) - Earnings season is drawing to a close and the results raise a number of worrying questions about the economy's direction.

For the second quarter, the percentage of companies beating revenue forecasts was the lowest since 2009. For every company that gave a positive outlook, nearly five companies gave negative outlooks, Thomson Reuters data showed.

Third-quarter earnings estimates are down sharply, and now show a year-over-year decline of 1.8 percent, which would be the first quarter of negative growth in three years.

Overall earnings growth for the second quarter looked pretty solid - 8.4 percent. But a charge taken by Bank of America (BAC.N: Quote) at this time a year ago skews everything. Take them out, and growth was just 3 percent, according to Thomson Reuters data.

Investors said the results raise red flags for coming quarters. Early in expansions, earnings tend to strengthen as cost-cutting efforts boost profits - but revenues tend to catch up as demand increases later in the cycle. That hasn't happened in an expansion nearing its third anniversary.

"What this is telling us is that the economy is slowing down, and that doesn't bode well for the bullish earnings expectations, which we are so used to," said Pankaj Patel, quantitative research analyst at Credit Suisse in New York.

"Generally there's always a gap, but this gap is much wider."

Despite this, U.S. stocks have held up. The S&P 500 .INX .SPX is just a few points from four-and-a-half year highs.   Continued...