Warnings wane but US still sliding

LOOKING for a silver lining in the fourth-quarter earnings cloud that will descend on Wall Street starting next week, analysts point out profits warnings are down sharply from the third quarter, which would suggest fewer negative surprises.

So far there have been 1,204 pre-announcements and only 46% have been warnings that earnings would fall short of expectations. The majority was made up of companies letting investors know they would meet or beat expectations. That is a dramatic improvement over the third quarter when 62% of the firms that issued guidance offered purely negative news.

Tom O'Keefe, an analyst with First Call, the Boston-based earnings research firm, has a theory as to why there has been a greater percentage of positive pre-announcements - simply, 11 September. The terrorist attacks on the US that day played such havoc with estimates that companies now feel compelled to alert investors as soon as they have a clearer idea of their financial status.

'We've seen so many more positive and on target pre-announcements because investors didn't know who was affected, or by how much,' said O'Keefe. 'Many firms have taken a proactive approach, letting people know in advance that they are going to do better, or meet expectations.'

An improved tone in the warnings season, however, does not translate into improved profits. The final quarter of 2001 is expected to be the fourth in succession where US corporate profits continue a slide marked by unusual severity and speed.

Constituents of the Standard & Poor's 500 index are expected to post a loss of 22% in the fourth quarter over the same period a year ago - the last time they managed a gain, albeit a modest one. A fourth-quarter slide of that magnitude would match the third quarter, after a decline of 17.2% in the second quarter and 6.1% in the first.

Today, Alcoa becomes the first Dow Jones constituent to report on the quarter with other big financial firms, including Sun Trust, Fannie Mae and consultancy giant Accenture close behind. Next week, the trickle turns into a flood with 200 firms from the S&P 500 set to issue their profit statements.

Among the big losers will be technology, expected to slide 64%, a slight improvement over the 71% loss in the third quarter, but still a long way from a recovery.

Analysts will be listening closely to executive briefings during fourth-quarter releases for any word that the industry can stem losses in the first quarter of 2002 and revive by the second.

Financial firms may be among the bright spots and are seen gaining 2.4% in the fourth quarter, helped by lower interest rates and a partially revived stock market. Any uptick in earnings would be a sharp improvement over the third quarter, when the sector's profits declined 17%.

Consumer staples are also expected to show modest gains, rising 4.3% in the fourth quarter after a flat third. Transport will take the biggest beating. The group, which includes the ravaged airlines sector, is expected to tumble 180% from a year ago.

Overall earnings are expected to drop in the first quarter - anywhere from 6% to 15% - but maybe pick up in the second, though the outlook for both periods will be clearer when companies give forward-looking guidance.

Right now, analysts project an 8.8% rise in second-quarter earnings for S&P 500 firms - against a 17.2% drop 12 months earlier - in part because comparisons with the year-ago period will be much easier.