Earnings under spotlight as economy slows

Third-quarter earnings season begins this week, with some analysts predicting the first decline in S&P 500 profits since 2009.

For many companies, the recession has been like the ultimate in dieting: cutting calories, cutting portions and hopefully -- cutting costs. Paul Larson, chief equity strategist at Morningstar, says the metaphor of losing weight is entirely applicable here.

“When you’re going on a diet it’s very easy to lose those first few pounds, but those last few pounds are very difficult and companies are in the position now of losing those last few pounds,” Larson says.

According to Larson, earnings growth since the recession has largely been driven by companies slimming. But Joe Foudy, a professor of economics at NYU’s Stern School of Business, says there’s not much more fat left for companies to cut.

“That can’t continue indefinitely,” he says.

Instead, in order to grow profits, Foudy says companies need the economy as a whole to grow. But, with China's economy slowing and Europe mired in a debt crisis, some industries, like those dealing in materials and energy are in for an especially tough quarter. Foudy says there’s at least one silver lining -- at home, housing prices are rebounding.    

“Once again, the American consumer -- despite a weak labor market, despite weak wage growth -- is still propping up much of the global economy,” he says.    

And that has both Foudy and Larson agreeing on another bright spot. Some sectors, like the financial industry, are expected to do well this quarter.

About the author

Sally Herships is a regular contributor to Marketplace.

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