Corporate profits slip, raising concerns

The U.S. economy is being buoyed by low gas prices, falling unemployment and a rebound in job-creation, but for Wall Street the real gauge of economic stability is corporate earnings.

If companies are spending money on new projects and ringing in higher sales and profit, then investors have something to smile about. But if the numbers aren't there, it can be a sign of declining growth and a return of the main affliction during the halting recovery -- weakening demand.

Although it is early in the latest quarterly earnings season, some investors are already worried. The oil sector is in chaos, and holiday retail sales were weaker than expected. The stock market is in a period of extreme volatility.

The global economic picture is another concern. Europe may be headed for another recession and China's economy is slowing down. How resilient are U.S. companies under these circumstances?

Analysts are concerned, and have been gradually lowering their earnings expectations in response. Back in October, analysts expected fourth-quarter earnings for companies in the S&P 500 index to reach 11 percent. But as problem areas began to surface, that outlook fell to 4.2 percent at the start of the year and now 3.5 percent, Reuters reports.

A few dozen companies have already reported earnings this time around, and the results have generally been solid. But keep in mind that analysts have been setting the bar lower and lower, so it's become easier to surpass plunging expectations.

And there have been some worrying misses, particularly with big banks. Bank of America's (BAC) profit tumbled by 14 percent, nicked by a drop in bond yields and slipping trade revenue. Shares of JPMorgan Chase (JPM) fell more than 4 percent Wednesday after weak earnings. Citigroup (C) became the third bank to disappoint investors this week.

Investors are perhaps the most pessimistic about the oil sector, which is reeling after oil has fallen more than 55 percent since June. Already oil companies are canceling new projects and laying off workers. Big names, including ConocoPhillips and Continental Resources, have whacked their spending plans for the year.

Oil's problems are spreading to non-oil companies. U.S. Steel (X) has cut back investments due to oil's drop. Caterpillar (CAT) isn't selling as many compressors and pumps to the oil industry, Macquarie Group analyst Sameer Rathod wrote in a recent note.

It's still too early to make a judgment about the current earnings season. Hundreds of companies still haven't reported their quarterly numbers, and solid numbers could restore the investor optimism that has gone missing lately. But a few more flubs, and the sprinkling of worry on Wall Street could escalate.