Despite high unemployment, a free-falling housing market, the European debt crisis, and the recent slowdown in China, one thing has been consistently strong since the recession ended: corporate profits. Now it seems the engine that had propelled the Dow Jones Industrial Average (^DJI 0.76%) to double since March 2009 is losing steam.
Corporate America's success following the recession came largely from increases in productivity, cost-cutting, booming overseas markets, and growth from the low bar set after the financial crisis.
Wall Street analysts now see earnings growth in the S&P 500 (^GSPC 0.52%) falling for the first time since 2009. The experts are projecting a year-over-year decline of $0.57 per share, or 2.2%, when companies report their third-quarter earnings. Some key bellwethers have already begun raining on the market's parade.
FedEx (FDX 1.10%) last week signaled that global economic growth was slowing and cut its own earnings forecast for the fiscal year by about 10%. Rival UPS was similarly pessimistic about the recovery.
Tech giant Intel (INTC +1.20%), often seen as an indicator for its industry, estimated that revenue would drop by 7% and earnings would fall 26%.
Finally, heavy-machinery maker Caterpillar (CAT 1.54%) recently cut its 2015 earnings forecast, citing economic growth slowing by more than expected. Coal and iron ore prices have fallen 20% this year, depressing demand for new mining equipment, one of its key segments.
What it means
Corporate profits are the most important factor in determining stock prices, so it's a bit odd that the market is close to five-year highs as a slowdown seems to be upon us. On the other hand, lower estimates can also be an easier hurdle for Wall Street to clear, as we saw two quarters ago when nearly every Dow component beat estimates. And because of a slowdown in fourth-quarter earnings last year, Wall Street is still expecting year-over-year growth in the next quarter, as well as in 2013.
So the coming earnings season could just be a bump in the road, but investors should still be on the lookout for any new warning signs. If profits come in below expectations, that could be a sell signal. Near-term guidance will also be scrutinized to see whether the market can sustain its recent rally.
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