Wall Street faces profit recession as earnings season begins

Sun Jan 10, 2016 2:06pm EST
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By Caroline Valetkevitch

NEW YORK (Reuters) - Wall Street's fourth-quarter earnings season that gets under way next week could confirm something many investors may not want to hear: the U.S. economy may be doing well but corporate profits are in a recession.

An earnings recession - two quarters of declining profits - would be led by the usual suspects, energy and materials companies. But its severity may depend on consumer discretionary companies, which have been warning about profits at an unusual pace.

Consumer discretionary companies, which led S&P 500 gains in 2015 and have had the second-highest average profit growth rate of any sector over the last five years, are more pessimistic than usual going into the quarter. That is despite the benefit of lower gasoline prices for consumers.

Consumer discretionary stocks rose 8.4 percent last year, thanks in large measure to Netflix (NFLX.O: Quote) and Amazon.com (AMZN.O: Quote), the year's best S&P performers.

While consumer discretionary fourth-quarter profits are forecast to be up 8.4 percent, that is below the 13.6-percent growth that was forecast only three months ago, according to Thomson Reuters data.

Twenty-five companies in this sector so far have warned and none gave positive guidance, the highest number of negative forecasts since at least 2006, according to FactSet. In a typical fourth quarter, only two-thirds of earnings pre-announcements in this group are negative.

By comparison, overall 85 S&P 500 companies guided below analysts' estimates for the quarter and 26 issued positive guidance, roughly in line with recent quarters, FactSet data showed.

Macy's (M.N: Quote) this week cut its earnings outlook for the second time and blamed a fall in sales on unusually warm weather that kept consumers from buying coats. It also cited the strong dollar.   Continued...

A sign hangs in front of U.S. flags outside of the New York Stock Exchange in New York September 1, 2015. REUTERS/Lucas Jackson