Traders work on the floor of the New York Stock Exchange on Tuesday.(Photo: Mario Tama, Getty Images)
NEW YORK -- It's not just third-quarter earnings spooking investors.
The bleak profit outlooks that CEOs are serving up have Wall Street on
the defensive, prompting investors to sell and lock in profits.
a big reason the market has hit a rough patch. A three-session slide
has dropped the Dow Jones industrial average 446 points, or 3.3%,
including Tuesday's 243-point tumble to 13,103. The Nasdaq composite
index on Tuesday closed below the psychologically important 3000 level
for the first time since Aug. 6.
it's still early in the reporting season, third-quarter results are
clearly shaping up poorly. Only 57% of the 145 companies in the Standard
& Poor's 500 that have reported earnings have topped forecasts,
well below the normal rate of 62%, Thomson Reuters says. In a sign of
weak demand in the global economy, only 37% of companies have topped
But what is really creating concern: the
negative profit outlooks. So far, 22 companies have issued profit
warnings for the fourth quarter, while just two said earnings would be
better than expected. So for every 11 profit warnings there is only one
upbeat forecast. That 11-to-1 ratio dwarfs the long-term average of 2.4
profit warnings for every better-than-expected forecast.
"The negative guidance is a cause of investor discomfort," says Greg
earnings analyst at Thomson Reuters. It "suggests that their profit
estimates for the fourth quarter may still be too high, which throws
doubt on the strength of the anticipated recovery in earnings."
Currently, analysts expect year-over-year earnings growth of 9.7% in the October-
worry is the fact that earnings are expected to be down in the third
quarter for the first time in three years. And history shows that very
seldom are profits down for just one quarter.
earnings have turned negative 18 times and the downturn lasted longer 15
times, or an average of 3.4 quarters, before growth resumed, Strategas
Research Partners data show.
If CEOs keep flooding the airwaves
with lower rather than higher earnings projections, it could spell even
deeper trouble for the stock market already facing plenty of uncertainty
in the November elections and looming "fiscal cliff" of potential
higher taxes and spending cuts.
'If you get a continuation of
those kind of negative-to-positive ratios, then that is a whole new
ballgame," says Craig Hodges, a portfolio manager at the Hodges Funds.
"It could take the market down and lower the price-to-earnings multiple
investors are willing to pay for stocks."