THE SHORT VIEW By John Authers - Earnings season is upon us

THE SHORT VIEW By John Authers - Earnings season is upon us
Copyright The Financial Times Limited 2006
Published: October 17 2006 03:00 | Last updated: October 17 2006 03:00


Earnings season is upon us. If the market is right, the third quarter will look much like the 12 quarters that preceded it. It will see S&P 500 companies increasing their profits by more than 10 per cent, compared with a year earlier. That would match the postwar record of 13 consecutive quarters of double-digit earnings growth.

But what appears to be a highly bullish set of forecasts may have less of an impact on the markets than one might expect. The S&P 500 enjoyed its best September since 1998, sparking rallies in most of the other major equity indices, but not on any great optimism. During September, six of the S&P 500 sectors saw more downgrades to earnings forecasts than upgrades, according to Merrill Lynch.

The pattern is confirmed by Thomson Financial, which found "pre-announcements" by companies have been less optimistic than usual.

Thomson's "blended growth rate", which incorporates earnings that have been announced and forecasts, has dropped to 13.9 per cent, down from 15.3 per cent at the end of September. Thus the rally owes little to optimism. Instead, it has been fuelled by a declining oil price and - much more contentiously - by growing optimism that the US economy is heading for a "soft landing".

For the longer term, though, a lot depends on when the streak of double-digit earnings growth ends. Given recent moves in commodity prices, materials and energy companies look likely to suffer falling earnings next year. If the housing decline is as bad as it appears, financial services profits must take a hit.

According to Thomson Financial, bottom-up industry analysts expect the double-digit streak to survive into the current quarter, with gains of 10.8 per cent. But top-down strategists expect only 9 per cent. Next year, strategists expect a sharp slowdown, while company analysts still think earnings growth could be almost 10 per cent again.

The key question is whether the US economy can escape with a soft landing. But any long-term forecasts from companies over the next few weeks should also have more than the usual impact.