Stocks: The Lost Earnings Season

The coming blitz of quarterly results may leave investors more confused than ever about the outlook for corporate profits and the economy

By Ben Steverman

Apple, Microsoft, US Bancorp, and Dupont are all reporting earnings. Getty Images/Collage: Arthur Eves

For stock investors, this earnings season is turning into the lost quarter.

This month, companies began unveiling their results from the 2008 third quarter, which included July, August, and September. And the next couple of weeks will be especially busy, with 136 members of the large-cap Standard & Poor's 500-stock index reporting earnings during the week of Oct. 20, and another 114 firms the following week.

Investors are watching earnings results closely, desperate for some insight into an economy at a crucial tipping point. "We're really trying to get a handle on to what degree the economy is beginning to falter," says Robert Bacarella, portfolio manager at Monetta Mutual Funds.

Outlook is Hazy

But the problem, many professional investors say, is that the earnings outlook is just too hazy to provide much useful information this quarter. At the very moment when investors are desperate for certainty, companies' financial results from July and August—before the worst of the credit crunch hit—seem irrelevant.

Instead, many investors are listening to executives give their quarterly updates on future business conditions. However, many company management teams seem as confused as investors. Their statements are vague, and they don't sound confident in past predictions.

Credit problems and financial turmoil have been on investors' minds for more than a year, but credit shocks started hitting the economy in full force in the second half of September. Those troubles, which started with the failures of Lehman Brothers (LEH) and the bailout of insurer American International Group (AIG), have certainly shown up in early third quarter results.

Merrill Results Disappointing

According to Thomson Reuters, third quarter earnings for the S&P 500 are expected to fall 9.1% from a year ago. That includes both actual results from the 82 companies that have reported, and analyst estimates for the remaining companies.

Three weeks ago, on Oct. 1, analysts were predicting S&P 500 earnings would fall only 4.8% from a year ago. Financial firms are partly to blame for the falling estimates. For example, Merrill Lynch (MER) on Oct. 16 reported a loss of $5.56 per share, while analysts were expecting a $5.22-per-share loss.

The stock market usually looks ahead, trying to predict future earnings. So firms' profits or losses from the summer— before the financial crisis heated up—will generally be ignored.

Conference Calls Give Clues

However, says David Chalupnik, head of equities at U.S. Bancorp Asset Management (USB), financial earnings are an exception. He's watching bank earnings very closely to make sure, when it comes to credit losses, "they don't blow up." So far, they haven't. "Expectations are very low," Chalupnik says.

More financial earnings arrive soon from financial outfits National City (NCC) and Fifth Third Bancorp (FITB), both on Oct. 21.