For six straight quarters, Corporate America logged profit gains of 20% or more; in the second quarter alone, earnings rose a jaunty 41%. But amid growing economic headwinds, supercharged profits look to be about to end.
BusinessWeek's flash profit survey of more than 700 early-filing companies shows that third-quarter income from continuing operations before extraordinary items rose 15% over the previous year, on a 13% sales gain. (For a sample of 78 of those early-filers see the accompanying table.) Those numbers are broadly in line with expectations for the companies in the Standard & Poor's 500-stock index. According to Thomson First Call, analysts figure third-quarter earnings from continuing operations, excluding extraordinary and special items, will rise 15.9%.
Why the sudden drop in profit growth? Rising interest rates, slowing productivity gains, and high commodity prices were widely expected to bite into earnings. But steadily rising crude oil prices combined with a cooling economic recovery have conspired to hit profits harder than expected. Says Sung Won Sohn, chief economist at Wells Fargo & Co. (WFC): "The higher price of oil is not only hurting consumer spending, it's also hurting company profits." Just ask the airlines, which continued to lose altitude. Delta Air Lines (DAL) lost $646 million, while American Airlines (AMR) parent AMR booked $214 million in red ink.
Of course, some sectors still defied gravity. Big Oil, with its ample pricing power, promises to be one of the biggest profit machines this quarter. ConocoPhillips (COP), for example, reported a 60% jump in earnings, to $2 billion.
Analysts polled by Thomson First Call expect profits for S&P 500 companies to rise 15.3% in the fourth quarter. Not torrid, but solidly in the black.
By Stephanie Anderson Forest in Dallas