To examine diminishing profits growth, CBS.MarketWatch.com spoke with Chuck Hill, director of research at First Call, a company that tracks analysts earnings estimates on some 6,000 stocks.
To arrive at the S&P 500 profits picture, First Call measures earnings from continuing operations growth for the S&P 500 companies as compared to the third quarter of 1997. Hill sees analysts beginning to lower profits estimates for the first and second quarters of next year.
How do third-quarter profits look for U.S. companies so far?
Hill: For those companies that have reported so far, they're coming in 3.4 percent below what they reported last year. We think we'll probably end only down one percent. We're getting a lot of oil companies here that have dragged the number down some, but particularly in November, when we get the retailers reporting, that will pull it up some. So we don't think (profits growth) will be quite as bad as what the numbers show now, but we do think it will be in negative territory.
And if we do end with negative one percent for profits growth, that will be the worst quarter since...?
Hill: It will be the first time we've been negative since 1991 when we were in a recession.
Can we lay the blame on the oil sector, or does everyone share in this?
Hill: That's the hardest one certainly, as it was in the first and second quarter. But, it's not the only one. It's somewhat of a repeat of the first and second quarter in that energy, mainly oil, technology and the basic materials area - papers, metals, chemicals - were the three hardest hit. That's true again that those three are in there, but technology's not quite as bad as it was and that's reflected in the positive surprises in the technology companies that have reported.
But energy and basic materials got a little worse and then there are two other industry groups added to the mix in the third quarter: one is obviously the financial area, but also the capital equipment suppliers to the industries that have been hit in the first half of the year. We're talking about things like farm equipment, heavy construction equipment, paper making machinery, oil field equipment, etc.
To what degree had estimates been lowered by analysts?
Hill: We saw the estimates come down more sharply in the third quarter than either the first or the second quarter. On July 1, the expectations for growth for the S&P 500 were 10.2 percent. By Oct. 12, when the reporting season started in earnest, that had slipped to a decline of 3.2 percent.
And the fourth quarter? Are analysts lowering expectations there?
Hill: We still think they're somewhat too high at 7.4 percent expetations. We certainly think the numbers at least for the first couple of quarters of 1999 are still way too high. But, I will say in the last few weeks that those numbers have finally started to show some downward movement. We're at 11.1 percent (year-over-year earnings growth) now for the first quarter and 16.6 percent for the second quarter. We've actually seen a 3 percentage point drop in the last week for that first-quarter number.
For us to get to a bottom here in the market, you have to see some kind of capitulation from the analysts. That typically happens when they finally realize we're in a cyclical downturn and the glass is half empty, and then they they end up cutting the numbers typically too deep and a little too far out.
How many sell ratings are out there on stocks overall. Has that changed?
Hill: Less than one percent, total ... We have seen a little upward movement; stocks have come down some and analysts start putting more buys on, I guess, even this early in the game.
Written By Emily Church