Earnings Season Expected to Be Dismal for Most Sectors

By JACQUELINE DOHERTY

The first wave of dour fourth-quarter earnings reports indicates we are in the midst of the worst streak for corporate profits in more than 50 years.

Operating earnings for companies in the Standard & Poor's 500-stock index probably slid by 28% compared with fourth-quarter 2007 results. And the start of 2009 doesn't look much better. Analysts think earnings will decline by 20% in the first quarter and by 18% in the second, according to forecasts collected by Thomson Reuters.

If those estimates prove to be accurate, the total drop would be 35% since profits peaked in mid-2007. Since 1950, the only other decline approaching such magnitude has been the 32% falloff from September 2000 through December 2001 (a stretch that included the terrorist attacks of 9/11). The average peak-to-trough earnings decline during downturns in the same period was 18%, according to Strategas Research Partners.

Negative fourth-quarter comparisons have come from a diverse group of companies. For example, Bank of New York Mellon reported fourth-quarter net income of $28 million, down from $520 million a year earlier. Alcoa had a $1.9 billion loss. And Intel's quarterly profit sank 90%.

Only companies in the consumer-staples, health-care and utilities sectors are believed to have increased earnings in the fourth quarter, by 1% to 6%. The remaining sectors are likely to show serious declines.

Earnings in the materials sector are believed to have fallen 72%, owing to the collapse of commodity prices. For consumer-discretionary companies, the drop probably was 62%, as consumers scorned even discounted merchandise. Technology companies are expected to report an earnings drop of 18%, while industrial companies' reported profits may fall 21% and energy companies by 24%.

Earnings estimates may continue to come down for 2009. "Bottom-up" analysts -- those who cover individual companies -- are expecting members of the S&P 500 to post combined earnings of $70.73 a share this year. "Top-down" analysts, who look at broad economic forces, see just $63.78.

But all streaks -- even bad ones -- end some time. Wall Street is foreseeing a 4% drop in the third quarter but a 51% jump in the fourth, thanks to easy comparisons with end-of-2008 results.

That ray of hope could help stocks get a decent lift sometime this summer.

For more stories, see barrons.com