The will-he-or-won’t-he debate over President Bush’s war aims hasn’t completely drowned out a more traditional concern on Wall Street: corporate profits.
The so-called confession season is in full swing, during which companies forecast their quarterly results to be announced a few weeks hence. The current trend is aggravating to already nervous investors.
Headlines about profit warnings are likely to persist for several weeks, compounding the gloom over war talk, executive rip-offs and negative economic data.
“There are a lot of reasons not to get involved in the stock market,” said Jack Ablin, chief investment officer in the personal investment management group of Harris Bank.
Based on historical patterns, measuring earnings expectations and interest rates, the stock market represents a reasonable value, he said. “That being said, investors are still unwilling to join the party.”
So far, 52 percent of 813 companies that have offered guidance for current quarter results warned of disappointments, according to Thomson Financial/First Call. Twenty-four percent have said results would be better than analysts expected.
Companies that foresee trouble are more likely to issue early guidance, so a higher level of negative outlooks is no surprise. But in the last three quarters, the ratio of negative to positive guidance had been improving, according to First Call.
For example, at the same point in the confession period three months ago, 41 percent of the guidance for second-quarter results was negative and 35 percent was positive.
The upbeat trend has unraveled, and analysts are scrambling to cut their profit forecasts for hundreds of companies.
“I don’t have any reason to see that ratio change as we move into the peak preannouncement period at the end of September and first week of October,” said Charles Hill, research director at First Call.
On Tuesday, McDonald’s, a component of the Dow Jones industrial average, warned investors that its third-quarter profits would not reach levels forecast by stock analysts. McDonald’s shares fell $2.78, to $18.91, a seven-year low.
After the close of trading, banking conglomerate J.P. Morgan, another member of the Dow Jones industrial average, said its third-quarter results would be “well below’ its second-quarter profit of 58 cents a share. Analysts on average were predicting a third-quarter profit of 54 cents a share. J.P. Morgan shares dropped in after-hours trading.
Hill said profit growth is suffering in nearly all sectors, though consumer cyclicals, which include automakers, “continue to be a bright spot.”
Year-over-year growth in quarterly profits has been eroding, even for health-care companies and utilities, two areas of the economy that tend to hold up in times of economic stress, he said.
“The second half of the year isn’t going to recover at the rate that was expected,” even though current profits are being compared to a weak second half of last year, Hill said.
Tuesday’s action: Stock prices fell broadly in moderate trading, as investors wrestled with war jitters and profit warnings by several high-profile firms.
The Dow Jones industrial average fell 172.63 points, or 2 percent, to 8207.55. All but two of the 30 Dow industrials–Walt Disney and AT&T–lost ground.
The Standard & Poor’s 500 index fell 17.58, or 2 percent, to 873.52. The Nasdaq composite index lost 15.94, or 1.2 percent, to 1259.94. The Russell 2000 index of small-company stocks dropped 6.82, or 1.8 percent, to 379.31.
New York Stock Exchange volume reached 1.38 billion shares. The number of losing stocks topped the number of winners by a 7-to-3 ratio among NYSE-listed issues. Nasdaq volume totaled 1.5 billion shares. Losers outnumbered winners by a 5-to-3 ratio.
Treasury securities rallied, sending interest rates to fresh four-year lows. The government’s monthly report on industrial production, released early Tuesday, showed an unexpected decline last month.
Oil prices closed slightly lower, rebounding from a morning sell-off. Optimism faded during the day regarding Iraq’s offer late Monday to permit renewed United Nations weapons inspections.
