Corporate Profits: Dreams vs. Reality

If early returns are any indication, Wall Street may get a rude shock from third-quarter corporate earnings.

Over the past year, the stock market has rallied during each quarterly earnings period, as major corporations consistently reported profits that were better than analysts’ estimates.

This quarter may be different.

Of the 36 companies in the blue-chip Standard & Poor’s 500 index that have already reported earnings for the third quarter, 15 exceeded estimates and 15 disappointed. Six came in as expected.

The even number of positive and negative surprises is weaker than previous quarters, one week into earnings-reporting season. At July 8, for example, 37 firms in the S&P; had reported results, and 51% beat estimates, while just 35% were below estimates.

Analysts admit that it’s dangerous to make generalizations about earnings overall this early in the reporting season, with so few companies having revealed results. Still, disappointment with third-quarter earnings would fit a pattern: More companies fall short of analysts’ expectations in the third quarter than in any other, according to a study by the Institutional Brokers Estimate System.

Last week, some stocks were crushed even though their companies reported third-quarter results that topped estimates. Semiconductor maker Advanced Micro Devices, for example, plunged $5.125 for the week, or 17%, to $24.625 by Friday as investors ignored the firm’s robust third-quarter earnings report and focused instead on the company’s warning of tighter profit margins in the current quarter.

Overall, earnings tracker Zacks Investment Research in Chicago says analysts expect third-quarter operating earnings for the S&P; 500 companies to be up 14% from a year ago.