Wall Street week ahead

Wall Street week ahead: Big-name profit warnings may mean a pullback

NEW YORK: Wall Street may be bracing for a pullback as U.S. earnings season begins next week - if the clouds of profit warnings from bellwethers ranging from FedEx to Hewlett-Packard lead to a downpour of lower profits - or even losses.

Thanks to aggressive stimulus plans from central banks around the world, the Standard & Poor's 500 index gained 5.8 percent over the third quarter. That sharp rally occurred even as companies were struggling. Earnings for that period are forecast to fall 2.4 percent from the year-ago quarter. If that happens, this would be the first earnings decline in three years, according to Thomson Reuters data.

Market strategists and investors say U.S. stock valuations are broadly out of sync with earnings estimates. They forecast a pullback in stocks in the coming weeks as more companies report results and reduce expectations for the fourth quarter and beyond.

Fourth-quarter estimates for S&P 500 companies show a 9.5 percent gain in profit from a year ago, according to Thomson Reuters data. Analysts say that outlook is too high, given what investors are already hearing from the corporate world.

"It's a divergence right now where the valuations as far as equity prices (are concerned) have soared, and are really putting in place a stronger economy and stronger fundamentals," said Alan Lancz, president of Alan B. Lancz & Associates Inc., an investment advisory firm in Toledo, Ohio.

"But earnings will be the telltale sign," Lancz added. "And if the guidance isn't particularly strong, the market might be setting itself up for a little disappointment. I don't see a major correction, but I do see a pullback."

The earnings season will kick off on Tuesday with results from Dow component Alcoa after the bell. Analysts expect Alcoa's third-quarter results to show it broke even, down from a profit of 15 cents per share a year earlier, according to Thomson Reuters I/B/E/S.

JPMorgan Chase & Co and Wells Fargo, the first big financial names to report, are also on tap next week.

BLAME EUROPE

Nearly half of S&P 500 companies guiding lower for third- quarter earnings blamed weakness in Europe, according to a Thomson Reuters survey. Another 11 percent blamed the weak global economy, 8 percent cited strength in the U.S. dollar, and 6 percent cited the slowdown in China, the survey showed.

Weakness in the U.S. economy hasn't helped. The final read on U.S. second-quarter gross domestic product last month showed growth of just 1.3 percent, weaker than an expected 1.7 percent.

On Thursday, software maker Informatica Corp issued a profit warning and said business conditions were worsening in Europe. The software company is considered a bellwether because its products are used alongside those made by larger software companies.

"Parts of Europe aren't just in recession, they're in depression," said Jeff Kleintop, chief market strategist at LPL Financial in Boston. "I think (analysts) underestimated the extent of the global slowdown, and maybe are still underestimating it."

TECH FEELS CHILL FROM CHINA

While estimates have come down sharply in all 10 S&P 500 sectors since the start of the year, technology is one area where the lower expectations are most notable. Slower growth in China is a big factor in that trend.

Earnings growth in the tech sector is expected to be just 2.3 percent for the quarter, compared with a July 1 forecast of 13.1 percent. Apple Inc is a big driver of those gains.