Earnings Forecasts Have Rally Quivering More Companies Warn Of Looming Disappointments

The unrelenting drumbeat of U.S. companies warning their thirdquarter earnings won’t meet expectations has investors wondering if this is the quarter that will finally squelch the stock market rally.

Companies announcing profit warnings in the past few weeks encompass a broad slice of U.S. industry, from technology powerhouses like International Business Machines Corp. to heavy-equipment makers like Caterpillar Inc. to financial companies like insurer Acordia Inc.

At least 77 companies have warned investors that earnings won’t meet analysts’ estimates for the last quarter, according to statistics compiled by Bloomberg Business News. That’s up from 63 companies that issued profit warnings three days into the second quarter.

Analysts think many more disappointments are on the way, and that’s likely to be bad news for the stock market.

The concern is great because October is historically the month for stock market disasters, including the crash of 1929 and Black Monday in 1987.

At stake is a year of stock-market gains that has carried the Dow Jones Industrial Average up 24 percent this year, pummeling last year’s 2.1 percent increase. The 30-stock average set 49 all-time highs this year alone. If the gain holds through the final three months of 1995, it would be the Dow industrials’ best performance since a 27 percent gain in 1989.

The Standard & Poor’s 500 Index, which has been setting records too, is up about 26 percent, compared with 1994’s 1.5 percent drop. And the technology-laden Nasdaq Composite index has climbed 34.9 percent so far this year, blowing away last year’s 3.2 percent advance.

Last quarter’s earnings results, which helped boost stocks to those levels, were a tough act to follow. In the second quarter, 55 percent of the 499 companies in the Standard & Poor’s 500 Index that reported earnings beat Wall Street’s average estimates.

The reality is that earnings growth is slowing, said Benjamin Zacks of Zacks Investment Research in Chicago. “We’ve had 10 quarters in a row of earnings exceeding estimates in aggregate. This is the quarter where it looks like they’ll come in probably slightly below estimates.”

The economic slowdown will limit overall profit growth to about 17 percent in the third quarter, down from about 24 percent last year, said Zacks. He expects the weakening in profits to continue into the fourth quarter.

So which companies or industries should investors avoid? Many money managers are backing away from their technology shares on concern that analysts overestimated the demand for personal computers, cellular phones and computer software and thus how much computer-related companies can earn.

But disappointments aren’t limited to technology companies. On September 19, heavy machinery maker Caterpillar said its third-quarter earnings wouldn’t meet expectations. Household product companies Sunbeam Corp. and Colgate-Palmolive Co. have also warned profits will fall below estimates.

Analysts said the economy’s growth is being restrained by slow job growth, which curbs consumer spending. The Federal Reserve acknowledged a slowing economy when it trimmed the federal funds rate on overnight bank loans to 5.75 percent from 6 percent on July 6, the first such reduction in almost three years.

Some investors say this quarter’s profit outlook isn’t that bleak. While profit margins may narrow because companies can’t raise prices, economic growth will gain enough momentum to bolster sales in the next few quarters, analysts said.

“I don’t think that profit growth is over,” said George Jacobsen, chief investment officer at Trevor Stewart Burton Jacobsen in New York, which manages $1 billion in assets.

Errant analysts themselves could be the cause of earnings disappointments, some investors said.