Stock investors still basking in the glow of a superb fourth-quarter earnings season had better brace themselves for a chillier 2005 if they haven't done so already, because it appears to have arrived.
Thirteen companies of the S&P 500 index warned last week that first-quarter profit or revenue will fall short of forecasts — including Coca-Cola Enterprises Inc. — while only one boosted its targets. Among all of the companies tracked by Boston-based Thomson First Call, 55 warned while 19 issued positive preannouncements.
That raised the first-quarter ratio of negative to positive preannouncements in the S&P 500 to 2.6 per cent, meaning more than 2-and-a-half companies warned for every one that raised its outlook. That ratio is well above the historical average of 2.0 and the fourth-quarter ratio of 1.8.
The sudden surge in warnings and subsequent drop in earnings expectations came as a surprise to many investors, though several brokerages voiced concerns in January that 2005 earnings targets were still too high given that U.S. interest rates are rising.
“People have been waiting for earnings to slow down for quite some time. We could have had this conversation a year ago,” said George Vasic, strategist and chief economist at UBS Securities Canada Inc.
Profits among S&P 500 companies are now expected to rise 7.1 per cent in the first quarter from the same quarter a year earlier. On Jan. 1, analysts had expected earnings growth of 7.6 per cent.
That marks a sharp slowdown from the fourth quarter, which is on track to register a gain of 20.4 per cent for S&P 500 companies. That is on top of a year-earlier rise of 28.4 per cent, the highest quarterly growth rate in ten years.
“This does not necessarily add up to anything that changes your view of things but certainly when one is looking — as one is now — for the turn in earnings, information like this can help,” said Mr. Vasic.
He still expects the S&P/TSX composite index — up 4.5 per cent since the start of the year and 30 per cent in the last three years — will finish 2005 with a gain of 5 per cent.
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