What They’re Going to Make

Back in early September I wrote about how the earnings growth of the S&P 500 companies would slow down in the third quarter and how the stock market doesn’t like a slowdown in earnings growth. Today, with about half the companies having announced their third-quarter earnings, I thought it would be an appropriate time to check in on American corporate profit growth.

About two-thirds of the stocks that make up the Dow Jones Industrial Average and half the stocks that make up the S&P 500 index have now reported their earnings for the third quarter. And while results are all over the map, it now looks like the average earnings growth for these companies in the third quarter will be 16%. Not a bad number… but after four consecutive earnings growth periods of over 20%, it’s a letdown for the market’s bullish crowd.

It’s a letdown because one-fifth of the companies reporting earnings fell short of their own estimates. The last time so many companies missed their earnings estimates was back in the fourth quarter of 2002.

Please don’t get me wrong: Companies cannot grow their earnings at 20% a year without interruption… to believe so would be unrealistic. The long-term average annual growth rate is only 7% for the S&P 500 companies.

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The market looks not at what companies are making now, but at what companies will make in the future. And this is where we start to see the cracks.

— 3M Co. reported a third-quarter profit increase of 17%… but said its full year’s earnings would fall short of forecasts.

— Caterpillar doubled its third-quarter profit… but came out with a poor forecast for the remainder of the year.

— Microsoft reported an 11% increase in profit… but warned the current quarter’s profit would fall short of expectations.

— Amazon.com missed third-quarter profit estimates and said revenue for the full year would fall below consensus estimates.

Looking forward, the big companies, a real gauge of how this country’s business is faring, are revising their futures earnings growth down. Does this mean the economy is slowing down? Yes, slower corporate earnings growth usually results in slower economic growth.

But the key could be interest rates again. And if the Fed raises interest rates (it meets just after the U.S. Presidential Election) in early November, we can all count on a continued slowdown in our economy.