Keep an Eye Out for Earnings Cuts

With the third-quarter earnings season set to pick up, there is cautious optimism. However, we do expect some nasty numbers out there with the blame fully on the condition of the economy. Just try reading some of the recent headlines on the wires and you’ll understand the concerns.

 “US Bancorp 3Q falls 47 percent” DuPont 3Q profit falls on charges, cuts 2008 view” Caterpillar’s 3Q profit falls 6 pct” Nissan to cut production due to US slump” Freeport McMoRan profits fall by nearly a third”

 The bad news on the earnings front may only be the beginning and could surely lead to earnings downgrades from Wall Street in the upcoming weeks. The consensus is calling for a weak third quarter

and, unless we see some positive remarks going forward, stocks could edge lower over the next few weeks. Watch out for upcoming guidance cuts followed by downward revisions in analysts’ EPS estimates.

 The current valuations appear to be attractive at this time given the selling, but should there be earnings cuts, stock prices would be vulnerable, as the valuation of stocks will be higher. We believe it is only a matter of time before Wall Street crunches its numbers and spreadsheets and determines that the earnings assigned to companies are too high and need to be adjusted down. This would not be a surprise, as we have seen very little as far as downgrades despite the slowing economy in the U.S. and worldwide.

 But perhaps the recent downward move in the stock markets is just factoring in the expected cuts in earnings that are to come. Over the next few weeks, watch for earnings to be cut, as we see no other option for Wall Street.