Profit Views Show Toll Of Credit Crisis, But Not For Long?

October 08, 2007: 08:05 PM EST

Oct. 9, 2007 (Investor's Business Daily delivered by Newstex) --

Profit growth likely screeched to a virtual halt in the third quarter. But Wall Street already is betting corporate earnings will quickly rev back into high gear.

Hit by the credit crunch, third-quarter profits for S&P 500 companies likely rose just 0.8% vs. a year earlier, according to Thomson Financial. That would be the worst showing since the start of 2002.

Actual profits typically top views by about 3 percentage points.

Earnings estimates have fallen sharply in recent days. Just a week ago, analysts saw 3.6% growth.

That's almost entirely due to big banks. Citigroup (NYSE:C) C, Merrill Lynch (NYSE:MER) (OOTC:MERIZ) MER and Washington Mutual (NYSE:WM) WM all have warned they'll miss forecasts.

S&P 500 financial firms are now seen posting a 6% profit drop. A week ago, analysts saw a 4% gain.

Yet investors have rushed back into stocks, especially financials.

"The credit crunch is being interpreted as a one-quarter story," said John Butters, director of earnings research at Thomson Financial. "Look at the fourth quarter. The estimates haven't changed all that much."

Analysts see 11% growth in the fourth quarter, with continued strength in 2008.

How can profit growth reaccelerate amid a soft U.S. economy?

"Roughly 45% of the S&P 500's sales come from overseas vs. 32% in 2001," said Alec Young, equity strategist at Standard & Poor's. (NYSE:MHP)

So strong overseas economic growth and the weak dollar are fueling multinationals' results.

Hefty stock buybacks also are boosting earnings per share.

Meanwhile, some sectors should enjoy strong third-quarter results.

Health care profits are supposed to rise by 12%, led by Merck (NYSE:MRK) MRK and other drug makers, Butters said.

S&P 500 tech firms' earnings are expected to climb 10%.

"We're seeing a lot of estimate upgrades to technology recently," noted Dirk van Dijk of Zacks Financial Research.

Joining financials on the downside, consumer discretionary firms likely will suffer a 7% profit slide as home builders post or predict big losses. Excluding builders, discretionary profits should rise 6%.

Energy profits should fall 4%, even with oil prices near record highs. Refining margins have fallen, and natural gas prices aren't up as much as oil. Companies also face tough year-ago comparisons.

Profit views on financials may keep heading south.

"A lot of banks have yet to step into the confessional," said van Dijk. He adds that analysts are still reacting to warnings from Merrill and others.

Preannouncements outside of finance have been sparse. But they may pick up this week.

Ryder R said Monday it will miss third-quarter profit views, citing weaker commercial rentals and broad economic weakness. The truck leasing firm's shares fell 7%. The Dow transports skidded 1.2%.

After the close, Yum Brands (NYSE:YUM) YUM said third-quarter profit rose 19%, easily beating views. Yum, owner of KFC, Taco Bell and Pizza Hut, rose 3% in late trading after surging 6% to a new high ahead of results.

On Tuesday, Alcoa (AMEX:AA.PR) (NYSE:AA) AAwill be the first Dow component to report.

Next week tech giants Google GOOG, Yahoo (NASDAQ:YHOO) YHOO, Intel (NASDAQ:INTC) INTC and eBay (NASDAQ:EBAY) EBAY are up to bat.