Pessimism is in vogue. As third-quarter earnings roll in, Wall Street's analysts are slashing prior estimates, predicting many dire months ahead for major American companies.
Just 55 of the S&P 500 companies have seen estimates of their likely earnings in the fourth quarter revised upward, while 424 companies are facing declines. "That's telling me that earnings are going over a cliff," says Dirk van Dijk, director of research for Chicago-based Zacks Investment Research, which compiles the earnings forecasts of Wall Street analysts. "Estimates were way too high given the soft economy, and analysts are diligently whacking at them with a machete."
The bottom line: Securities analysts now expect the fourth quarter and 2009 to be much tougher on corporate America than they did just a month ago. Part of this new burst of cynicism is coming from the brutally candid earnings that guidance companies have been providing lately. "What management is saying on these [conference] calls is basically 'Life sucks,'" says Van Dijk. (He titled his investment report for the close of October "Halloween Comes Early: The Drop in Earnings Expectations Is Scarier Than Any Witch or Werewolf That Shows Up at Your Door.")
Corporate fear stems in part from sliding consumer confidence, which this week hit its lowest point ever recorded. "Consumers have been impacted by a serious downturn in every form of wealth and income that supports consumer spending, and battered by high levels of volatility in their stock accounts," says Stuart Gabriel, professor of finance at UCLA's Anderson School of Management. The diminished value of stocks, falling home prices and fears about potential unemployment combine to create a negative "wealth effect," making consumers feel poorer. As a result, they spend less. Robert Hansen, professor of business administration at Dartmouth's Tuck School, says unprecedented uncertainty is making the public mood darker still. "People are so unsure of what's out there that they're expecting the worst," says Hansen.
Excluding the financial sector, which is living through its own nightmarish quarter, the consensus analyst expectation is that S&P 500 earnings will surpass last year's dismal fourth quarter by a slim 1.2%, a figure that may soon fall into negative territory.
Some sectors are getting hit harder than others. At the beginning of October, analysts were expecting the materials sector, which includes big mining and steel companies, to be up 29% for the fourth quarter. But that collective estimate is now -12%, a nosedive resulting at least in part from tanking commodity values. "Analysts feel that earnings weakness is spreading beyond the financials and consumer discretionary sectors, which includes industries like retailing and travel, into other sectors like energy and industrials," says John Butters, director of U.S. earnings research for Thomson Reuters. Among the few companies that may buck the negative trend in analyst expectations are airlines, which may benefit from falling fuel costs.
Overall, analysts are pessimistic about how the market will do in 2009, but there remain a wide range of viewpoints. "There's a lot of disagreement about how bad the economy will get," says Tim Gaumer, director of fundamental research for Starmine, an investment research firm, "but analysts are still more optimistic than economists, who say we'll be lucky if we see 0% growth in 2009." A dismal science, indeed.