Fourth-quarter earnings could test market's resilience after recent rally

NEW YORK - Investors aren't supposed to care about bad news anymore.

At least that's what a lot of experts were saying as Wall Street rode an 18 per cent rally in the Standard & Poor's 500 index since late November.

Now, that faith is about to get tested. During the next three weeks, companies will close the books on 2008, releasing their results for the fourth quarter and full year. Conventional wisdom says the numbers will be dismal. Analysts are forecasting that earnings growth rates for the S&P 500 companies will fall 15.1 per cent for the fourth-quarter and 11.1 per cent for the year, according to Thomson Reuters.

Those expectations are down sharply from only months ago. Per-share earnings for the companies in the S&P 500, excluding costs like write-offs, are expected to be US$16.19 for the fourth quarter. That's well below the $23.18 forecast at the end of September.

But most of that has been anticipated by investors. What they want to know now - and what may drive the market - is what companies say about 2009. And that could be very bad news.

"We're going to have a disastrous earnings reporting season," said Art Hogan, chief market strategist at Jefferies & Co. in Boston. "There's no historical comparison to the magnitude of how bad this earnings season is going to be."

This week one marquee company after another warned business is even worse than expected:

-Wal-Mart Stores Inc. cut its fourth-quarter forecast after holiday sales fell short of what the nation's largest retailer had expected.

-Alcoa Inc., the world's third-largest aluminum maker, said it would cut 13,500 jobs, or 13 per cent of its work force, and slash spending and production.

-Intel Corp. reduced its fourth-quarter revenue projection for the second time. The world's largest maker of computer chips said revenue will fall $500 million short of expectations.

-Time Warner Inc., parent of People magazine, CNN and the Warner Bros. film studio, said it will lose money this year, largely because of a $25 billion write-off on the value of cable, publishing and AOL assets.

So far, investors aren't panicking. The S&P 500 is down 2.4 per cent for the week but months ago distressing news from corporate leaders would have sent stocks plummeting. But some experts warn that stocks could stumble if enough bad news saturates the market.

Robert Doll, chief investment officer of global equities at BlackRock Inc. in New York, said fourth-quarter numbers "hardly matter" because companies are likely to cram as many losses as possible into these results.

"There will be lots of attempts, I think, to do the write-offs necessary to clean the books for 2009," he said.

This is a typical manoeuvre to make the results a year from now look better. Analysts and investors typically have a short memory and reward companies that show year-over-year profit growth, even if the starting point is distorted.

The numbers for the fourth quarter won't look good alongside any yard stick. Seven of 10 of the industry groups that make up the S&P 500 index are expected to post lower earnings from a year earlier.

The only gains are expected in the consumer staples, health care and utilities industries. Wall Street expects earnings growth rates of 4 to 6 per cent in these businesses because even in recessions consumers still need shampoo and toothpaste, they still get sick and still have to pay to power and heat their homes.

Job cuts, a weak housing market and the 38.5 per cent drop in the S&P 500 index in 2008 have forced many consumers to give up unnecessary purchases. That hurts most retailers, restaurants and hotel chains that depend on people wanting to spend extra money. Earnings growth among consumer discretionary companies is seen falling 56 per cent from the fourth quarter of 2007.

Materials companies in businesses such as mining and steel making are also suffering from plunging commodity prices and slumping demand for raw materials because of the global economic slowdown. Earnings growth is expected to fall 69 per cent.

Wall Street knew the fourth quarter, which began in October, was going to be lousy. In September, the brokerage Lehman Brothers Holdings Inc. collapsed and the government bailed out insurer American International Group Inc. That essentially halted lending and the stock market plunged. Fearful consumers and businesses then became less willing to spend.

Al Goldman, chief market strategist at Wachovia Securities in St. Louis, expects the economy won't hit bottom until this summer and that earnings won't begin to improve until the end of 2009. But he said the poor numbers coming from companies also won't shock the stock market like the financial turmoil of the fall did.

"Everybody expects them to be terrible and at least when they come out they're on the table and they're history," he said, referring to lacklustre results. "Confidence is still razor thin and so it's not a one-way street, but basically the mood is improved."