Year-over-year profit growth is expected to slow to 10.2% this quarter.… (Scott Eells, Bloomberg )
Despite the struggling global economy, investors for the last two years have gotten used to corporate America generating robust earnings gains.
But the profit picture now is getting cloudier: Although third-quarter results again were stellar, Wall Street analysts have slashed estimates for the current quarter and the first period of next year.
"Earnings growth is very quickly decelerating," said David Rosenberg, chief market strategist at money manager Gluskin Sheff & Associates in Toronto.
That's another potential drag on the stock market, already reeling from the deepening debt crisis in Europe and fear of spillover to the U.S. economy.
Share prices were broadly lower Wednesday for the third straight day, with the Dow Jones industrial average falling 236.17 points, or 2.1%, to 11,257.55, its lowest finish since Oct. 7.
One bright spot in the market was farm machinery giant Deere & Co., which rose $2.80 to $74.72. The company said net income soared 46% in its fiscal quarter ended Oct. 31, topping analysts' expectations.
Deere was a reminder of how blue-chip companies' earnings have underpinned the stock market's rebound since March 2009.
Most major companies are on calendar fiscal years and have already reported results for the three months ended Sept. 30. The data show overall per-share net income for the Standard & Poor's 500 companies rose 17.9% from a year earlier, according to Thomson Reuters.
That marks the eighth consecutive quarter of double-digit growth in earnings.
But analysts in recent weeks have been hacking their estimates of S&P 500 fourth-quarter earnings, in part responding to lower guidance from the companies themselves.
Year-over-year profit growth is expected to slow to 10.2% this quarter, Thomson Reuters data show. That's down from the 15% gain that analysts had predicted at the beginning of the quarter.
Growth is expected to decelerate further in the first quarter of 2012, to a modest 6.8%.
Of course, even slower growth still would mean that earnings of many companies would be at new highs. And it's possible that analysts are being too conservative with their estimates, the pattern of the last two years.
Earnings depend on revenue, and corporate revenue growth has belied fears that the U.S. and global economies were heading into another recession.
Revenue for the S&P 500 companies jumped 11.5% in the third quarter from a year earlier, said Sam Stovall, chief investment strategist at S&P in New York.
With that kind of strength in sales, "We think we're in the fourth or fifth inning of the earnings cycle," said Nick Raich, head of research at Key Private Bank in Cleveland. Earnings "have not fallen off a cliff," he noted.
Many companies have continued to run lean, a big reason why job growth has been so weak.
Also, U.S. multinational giants have benefited from strong demand for their goods and services in emerging-market economies including China, Brazil and India.
Despite anemic U.S. growth, "You have to think about where the marginal growth is coming from" in the global economy, said Barry Knapp, market strategist at Barclays Capital in New York. That is the developing world, he said.
Deere said Wednesday that equipment sales jumped 31% outside the U.S. and Canada in the latest quarter, double its American and Canadian sales growth in the period.
But companies' increasing reliance on foreign sales also leaves them vulnerable if economic growth slows significantly overseas. That has become a bigger concern in recent months, given Europe's woes and as China has tried to slow its economy to combat rising inflation.
On Wednesday a preliminary index of Chinese factory activity in November showed the weakest pace of production since March 2009.
What's more, the currencies of India and Brazil have plunged in recent weeks as investors have moved away from riskier economies and markets. That is making U.S. goods more expensive for Indian and Brazilian consumers.
It took a record high of 52.37 Indian rupees to buy one U.S. dollar's worth of exports Wednesday, up nearly 14% from 46 rupees in early September.
Some analysts believe that Europe's unrelenting debt crisis poses the biggest threat to corporate earnings. Although Europe buys only about 20% of U.S. exports, Knapp said European banks play a huge role in financing global trade.
As the banks face a greater risk of loss on European government bonds, their willingness or ability to lend is shrinking. Gluskin's Rosenberg predicts that "the mother of all credit contractions" is coming in Europe.
A worsening crisis in Europe also could have a depressive effect on what has been surprisingly resilient consumer and business spending in the U.S.
Knapp believes that S&P 500 companies' earnings overall will rise about 6% in 2012, down from an estimated 16% in 2011.
"We still don't think the U.S. is going into recession," he said, but given the threats to the global economy, "we don't see a scenario for upside surprises from here, either."