Strategy

Earnings Warnings Rise for S&P 500

Ratio of negative to positive pronouncements is at its highest since the first quarter of 2003.
Stephen TaubJuly 12, 2005

On at least two measures, the second quarter is shaping up as the worst three-month period for corporate profits in several years.

On the eve of the quarter’s reporting season, for every company in the Standard & Poor’s 500 that said things were looking better than anticipated, 2.5 companies warned that their results would be lower than expected, reported USA Today, citing data from Thomson Financial.

Typically the ratio of negative to positive pronouncements is about 2 to 1, added Thomson’s John Butters; 2.5 to 1 is the highest such ratio since the first quarter of 2003.

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Companies from a wide cross-section of industries issued earnings warnings, wrote the newspaper, including craft seller A.C. Moore, restaurant Applebee’s, business software makers Altiris and Vitria, and motorcycle maker Harley-Davidson.

The picture is still pessimistic, but less so, over the universe of all 5,500 companies that Thomson monitors. USA Today noted that 2.2 companies in that group issued earnings warnings for every company that raised its expectations. That ratio is in line with historical averages, which would indicate that the earnings picture is brighter among smaller companies, the paper pointed out.

That said, earnings warnings in general portend slower-than-expected profit growth, and earnings growth is already expected to be modest compared with growth during recent periods.

According to USA Today, citing S&P data, profits are expected to expand by just 7.8 percent in the second quarter after growing 13.4 percent in the first quarter and averaging 20 percent growth the previous 13 quarters. In addition, observed the paper, the second quarter is shaping up to be the first in three years with single-digit growth.

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