Companies post profits, but investors worry

Associated Press

NEW YORK

Investors who doubted U.S. companies could make big money in a weak economy have been proved wrong again.

Before companies started reporting earnings two weeks ago, investors worried third-quarter profits might fall short of what Wall Street analysts were predicting. The fear helped push stocks nearly into a bear market. More companies than usual warned the faltering recovery could hurt business.

The reality has turned out different.

Among S&P 500 companies reporting so far, 7 in 10 have posted higher profits than expected, called “beats” in Wall Street parlance. For all S&P companies, profits are now on course to rise 14 percent, the eighth quarter in a row they will have grown more than 10 percent. Profits for 2011 are on pace to surpass the annual record set in boom times four years ago.

Stocks have rallied in response. Yet some companies beating expectations are getting punished. Last Monday, stock in IBM Corp. fell sharply even after posting better-than-expected profits. And stocks still are priced relatively low compared with earnings.

Part of what’s bothering investors is fear of another economic slowdown. They worry that if Greece defaults on its debt, it could set off another global financial panic and tip the already fragile U.S. economy into recession.

A recession could mean big trouble for stocks. A year after the last recession started, near-record profits for the S&P 500 turned into losses. The index fell by half, reaching a 12-year low in March 2009.

“People are saying it doesn’t really matter what companies earn if we fall into recession,” says Sam Stovall, chief investment strategist at Standard & Poor’s.

Investors are right to worry for another reason: Those corporate “beats” are less impressive than they seem.

Wall Street analysts generally think the U.S. is going to avoid a recession and that stocks are a bargain. Yet they’ve been cutting their estimates in the months leading up to this reporting season, according to John Butters, senior earnings analyst at data provider FactSet.

Which raises the question: Why get excited about a company that beats estimates that have been lowered?

“I’d be more impressed if the numbers hadn’t come down,” says Butters, who calculates estimates fell an average 4 percent from this summer through earlier this month. “It’s a solid drop.”

Estimates for early next year have been cut even more. Whereas analysts used to expect an 11.9 percent rise in S&P 500 earnings for the first quarter, for instance, they now see them growing 7.7 percent.

Analysts have turned sour mostly on three industries: financials companies such as banks, telecommunication companies and steel and other materials makers.