Wall Street red alert on earnings

WALL Street is always volatile during the profits warnings season, but the one now under way is proving particularly turbulent. Investors are bracing for the next two weeks - peak warnings season - having already heard disappointing forecasts from some big names.

Computer parts maker Intel, hi-tech systems provider Nortel, computer giants Honeywell and Lucent and media group AOL Time Warner, recently joined the long list of companies to alert investors that third-quarter targets will be missed or that figures will be at the low end of expectations.

This quarter was supposed to be the one in which profits staged a boisterous comeback. Instead, 52% of the 190 companies in the Standard & Poor's 500 to give early guidance have said they will not meet expectations, against 39% at this point in the previous three months. Even worse, the number of companies with a positive outlook has plunged. At this point last quarter, 61% of firms said they would beat profit expectations. This time, only 22% expect to top targets.

Analysts consider the negative-to-positive guidance ratio an important indicator of profits for the following quarter too. The bad news-to-good news ratio is 2.3, nearly double last quarter's 1.2, and ends a three-quarters trend of improvement.

'We said all along Wall Street's analysts were far too optimistic about earnings for the second half of this year and now reality is sinking in,' said Thomson First Call analyst Joe Cooper. 'We are still growing earnings on a sequential basis, just not straight up and not nearly as fast as everyone had hoped.'

At the beginning of July, analysts surveyed by First Call, the Boston-based earnings tracker, expected 16.6% growth in profits in the third quarter. The expectation has dropped to 11% and is likely to continue to fall.

Economists blame sluggish growth, wary consumers and general corporate nervousness. For instance, capital spending has yet to expand significantly from recession levels. Given volatile stock markets, a potential war in the Middle East and stubborn unemployment, it is hard for consumers and executives to be upbeat.

'It wasn't a normal recession and we aren't having a normal recovery. It is a lot softer and a lot slower,' says Cooper.