As the outlook for world growth darkens, earnings are melting away. American firms haven’t been this pessimistic about their prospects for ten years: for the current quarter, negative pre-announcements outnumber positive ones by 3.5 to one. Profit warnings from major international companies have spread.
S&P 500 profits are expected to shrink marginally on an annual basis in the second quarter. That would mark the worst growth rate since 2009. Globally, operating profits – stripping out one-off charges – are falling at an annual rate of 5%, notes Société Générale.
It also bodes ill for equities that “global investors may still be expecting too much from companies”, says Robert Cole on Breakingviews. For instance, eurozone earnings fell by 6% in 2011, yet the latest estimates still point to profit growth this year. This time last year, analysts expected earnings to rise by 9% in 2011. There is also scope for disappointment in America, where there are still forecasts of double-digit annual profit growth in the final quarter of 2012.
So when might the drag on markets from earnings abate? Keep an eye out for a slowdown in the pace of earnings forecast downgrades, says James Mackintosh in the FT. In both 2009 and last autumn that “marked the bottom for equities”. Unfortunately, “there is no sign of that yet”.