By Michael Mackenzie and Ajay Makan in New York
Earnings expectations for global equity markets are being cut by analysts as economic growth slows and the eurozone debt crisis casts a pall over the region?s major banks.
The reduction in expectations is a sign that analysts are recognising risks that equity market investors have been seeing for some time, with global stocks sharply lower since mid-July.
Ahead of the forthcoming earnings season for the third quarter next month, investors are keenly attuned to further downward revisions as well as profit warnings from companies.
?I think earnings estimates will continue to fall,? said Christine Short, who tracks analyst forecasts for US companies at Standard & Poor?s.
?Analysts don?t want to be the first to lower expectations for a company,? she added. ?But once the companies themselves start offering guidance on third-quarter earnings, and results season gets under way in October, estimates will probably fall further.?
US post-tax corporate profits have rebounded sharply in proportion to the broad economy since the financial crisis. With margins elevated, some investors are primed for a reversal.
Analysts have cut their average forecast earnings per share growth for S&P 500 companies in the third quarter from 16.4 per cent at the start of July to 13.2 per cent, according to FactSet, the data supplier. The drop has been led by materials, financials and telecoms sectors. For 2011, the average growth estimate is 15 per cent, and that has eased from 15.3 per cent since the end of June.
An index compiled by Citigroup shows that global earnings revisions have fallen to their lowest level in 18 months, led by European companies.
Analysts at Citi said continental European banks and companies based in the weakest areas of the eurozone have yet to see a slowdown in the pace of earnings per share downgrades.
The bank?s global Earnings Revisions Index, which indicates the balance between earnings upgrades and downgrades, has fallen from -0.32 to -0.37, its lowest level since March 2009, when global equities were at their nadir during the financial crisis.
For the full year, analysts forecast a record $97.83 in earnings per share for the S&P 500, exceeding 2006?s $87.48. They expect full-year earnings to reach $111.01 in 2012, according to FactSet.
Jack Ablin at Harris Private Bank said: ?The market is looking beyond these analyst expectations.? With the S&P 500 well below 1,200, he estimates investors are pricing in an earnings slide of more than 20 per cent for 2012 to about $80 a share.
? The Financial Times Limited 2011