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Corporate earnings expected to disappoint

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With the fall foliage arriving, it must be third-quarter earnings season on Wall Street. Analysts are not looking for a lot of cheer out of major companies releasing their financial results. The reporting starts Tuesday after the close of trading, with aluminum giant Alcoa expected to reveal a profit of perhaps 1 cent per share, compared with 15 cents per share this time last year.

While the major stock market indicies remain high, earnings performance across many sectors is suffering. Alcoa is something of a bellwether — like many big multinationals, it’s done pretty well in the recovery, but it’s also highly dependent on manufacturing and export markets, which have suffered from the global slowdown, led by Europe and China.

Overall, companies in the S&P 500 that have warned of a decline in third-quarter earnings outnumber those predicting an earnings improvement by more than four to one, according to Thomson Reuters. Chris Low of FTN Financial says that despite a strong stock market, “earnings forecasts this quarter are for the first decline in earnings since the recession ended.”

Mark Zandi, chief economist at Moody’s Analytics, says corporate coffers are full of cash right now because companies downsized dramatically during the recession, cutting workers and costs, but earning more money at this stage in the recovery is difficult. “Historically, at this point in the business cycle, businesses start looking for revenue opportunities,” says Zandi. “They expand, grow, hire, invest. They get most of their growth from revenues, not from lower costs. So that’s the challenge for them.”

Zandi says companies face a host of uncertainties — from Middle East unrest to the looming U.S. ‘fiscal cliff’ of tax increases and deep across-the-board spending cuts. Those unknowns make taking the risk to invest and hire more workers even harder.

Global macroeconomist Rob Carnell at ING Financial Markets in London agrees with Zandi that U.S. multinationals will have a hard time generating significant revenue growth going forward. “If firms don’t know what the future fiscal layout is going to be, and don’t have any confidence in their export markets, they’re going to be reticent about moving forward,” says Carnell.

“But better to have strong balance sheets than not. So if we’re looking for a silver lining, that is helpful. But the share-buyers, the stock-pickers and asset-allocators, still want earnings growth. Because in the end, the stock market is only worth what the future stream of earnings is going to deliver, so they’ll still be disappointed.”

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