Gee, wonder why it took so long for someone to connect the dots. Scarce credit, high commodity prices, and a economy that’s weakening despite the Fed pulling out all stops do not bode well for corporate earnings. Yet consensus earnings forecasts predicted a rise in profit for the S&P 500 in 2007 and and an appreciation in the index by year end. The disappointing earnings announcement by GE has finally punctured the illusion that the impact of the credit crunch will be limited to Wall Street.
Goldman Sachs Group Inc. strategists say the U.S. corporate earnings season got off to an “awful” start and shares will drop as companies slash forecasts for the rest of 2008.
“We expect generally disappointing results and a swath of lowered profit guidance that will drive the Standard & Poor’s 500 Index lower,” a team led by David Kostin, Goldman’s New York- based U.S. investment strategist, wrote in a report today…
Kostin, 44, said last month that the S&P 500 may finish the year at 1,380, down 6 percent from the end of 2007. The forecast is the most bearish since at least 2000 by Goldman, which profited as other investment banks lost money on subprime mortgages. Morgan Stanley, the second-biggest securities firm, said today that profits are too high relative to the size of the U.S. economy.
The forecasts conflict with estimates by Wall Street analysts that earnings at S&P 500 companies will rise 14 percent in the third quarter and 55 percent in the fourth. Predictions of a “speedy recovery” are too optimistic and stocks will drop when investors view estimates with “appropriate skepticism,” Kostin wrote.
Goldman said worse-than-expected earnings from GE, the world’s fourth-largest company by market value, and Alcoa, the third-biggest aluminum producer, are harbingers. Analysts have reduced expectations for S&P 500 earnings growth during the second half of 2008 “only slightly” even after cutting first- quarter projections by 17 percent, Kostin wrote….
Analysts surveyed by Bloomberg have cut their projections for first-quarter earnings at S&P 500 companies every week since Jan. 4. They now predict a 12.3 percent drop, compared with an estimate for an increase of 4.7 percent at the start of 2008.
Analysts are currently estimating 2008 profit growth of 11 percent for S&P 500 companies, down from 15 percent at the start of the year, according to Bloomberg data. The index has declined 15 percent since reaching a record in October…
After-tax corporate profits relative to U.S. gross domestic product are “well above sustainable levels,” Morgan Stanley strategist Gerard Minack wrote in a report today. He said a U.S. recession and increased competition will cause earnings to decline.
“If profits fall as much as I think they could, then markets are not cheap,” Minack wrote.