U.S. Earnings Slowdown Looms as Groups Miss Targets

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Includes: IYY, SPY
by: Eddy Elfenbein

Eddy Elfenbein submits: As a bull, I'm not concerned right now about high valuations. The biggest fear I have is slowing earnings. Today, the Financial Times looks at -- not falling earnings -- but slowing earnings growth.

More than 22 per cent of the 400-plus S&P 500 companies to have reported results for the fourth quarter of 2006 failed to meet Wall Street expectations. This is the highest level of "misses" since the third quarter of 2004, according to Reuters Estimates.

The spike in earnings disappointments increases the chances that corporate America will end a three-and-a-half year run of quarterly double-digit profit growth in the last quarter of 2006 rather than at the beginning of 2007, as widely expected.

Missing earnings forecasts is particularly embarrassing for U.S. companies because, unlike most of their European counterparts, many set their own yardsticks by providing analysts with quarterly earnings guidance.

"The period of rapid earning growth is at an end," said Ashwani Kaul, senior research analyst at Reuters Estimates. "Companies have reached levels of high absolute earnings and cannot be expected to continue at this pace. We are entering a low earnings growth environment."

This article has an unnecessary negative slant. It's true that forecasts for earnings growth are being ratcheted back, but still only 22% of companies have missed expectations. That's not a large amount. It's the most in over two years, but the last time wasn't a signal of a market top.