NEW YORK – Investors expected fourth-quarter earnings would be bad, just not this bad.
About half of companies’ reports for the final three months of 2008 have fallen short of Wall Street’s already lowered expectations – and it’s still early in what’s known as earnings season. The weak showing has short-circuited a rally in the stock market and raised fears that the coming weeks will bring more volatility as companies keep disappointing investors.
Fifty of 92 companies in the Standard & Poor’s 500 index that reported results through Thursday turned in numbers weaker than analysts forecast, according to S&P. Stocks rallied from late November through early January on the belief investors were prepared for whatever ugly numbers companies would show for the final quarter of 2008. But the lousier-than-expected reports and murky forecasts have shaken investors.
“Big name companies are looking forward and saying ’We don’t have a clue what’s going to happen’ and that’s pretty unsettling to the market,” said Jennifer Ellison, a principal at Bingham, Osborn & Scarborough in San Francisco.
Wall Street is having trouble digesting the first batch of corporate results in part because many of the reports are from financial companies. Their businesses are among the hardest hit parts of the economy because of rising levels of bad debt and a falloff in lending. And the woes of the financial companies are making it harder for companies in other industries to know when crucial elements of the economy like borrowing and consumer spending might pick up again.
“The financials are still a mess and I think that’s probably driving the market the most,” Ellison said.
Wall Street has now given back most of the 24 percent gain it enjoyed from Nov. 20, when the S&P 500 closed at an 11-year low, to Jan. 6. Now, the index is up only 11 percent from the November low.
Ellison said that without more substantive forecasts, traders will continue to have difficulty agreeing where stocks should be trading. That means more unpleasant ups and downs in the stock market are likely. In three straight sessions this week, the Dow tumbled 332 points, jumped 279 and slid 105 before ending with a moderate loss on Friday.
“If there is no clarity on future quarter earnings it has nothing to base valuations on,” she said of the stock market. “It’s just likely to spin around like a compass that can’t find north.”
David Kelly, chief market strategist at JPMorgan Funds in New York, said that even investors who were prepared for abysmal earnings reports are frightened by what the huge drops in profits say about the economy and its prospects for recovery.