Company profit slump seen running well into '09

Earnings for Standard & Poor's 500 companies are now forecast to decline in the final three months of 2008 by 0.6 percent from a year earlier, according to Wednesday's Thomson Reuters Director's Report, a daily analysis of earnings trends for the companies comprising the benchmark U.S. equity index.

As recently as Tuesday, the report indicated fourth-quarter earnings could eke out a small gain of 0.2 percent. The report compiles the forecasts of individual Wall Street stock analysts into an aggregate view of the earnings trend for the index.

Now, the report points to earnings extending their slump without respite through at least the second quarter of 2009, which would mark eight straight quarters of falling profits. S&P profits first turned negative, on a year-over-year basis, in the third quarter of 2007.

The dismal earnings outlook is one of the chief factors contributing to the near-record drop in U.S. stocks this year. With just four trading days remaining in 2008, the S&P 500 index is down more than 40 percent year-to-date, a drop exceeded only by the 47.1 percent fall in 1931 when the Great Depression was in full swing.

The profit picture detailed in the Director's Report has been deteriorating rapidly over the course of this quarter.

On October 1, analysts' forecasts suggested companies could post an impressive 46.7 percent rebound in earnings from the 2007 fourth quarter, according to the report.

Analysts had presumed for much of this year that the fourth quarter's comparisons with the final quarter of last year would be relatively easy. That's because it was one year ago that the first major wave of losses hit the key financial sector as a result of the U.S. housing market's crash.

But the overall economic picture has crumbled since September, when Lehman Brothers collapsed and sent the global credit crisis into high gear. Fourth-quarter economic output currently is forecast to be the weakest yet in the year-long U.S. recession.

The median forecast among economists in a Reuters poll published December 11 calls for U.S. gross domestic product to contract at a 4.3 percent annual rate in the fourth quarter, after contracting 0.5 percent in the third quarter.

Consumer spending, which accounts for more than 70 percent of U.S. GDP, has been particularly hard hit by job losses, dropping home prices and tightening credit conditions. As a result, profits in the consumer discretionary sector, which includes retailers of nonessential goods and even the ailing auto makers, are forecast to fall 54 percent from a year earlier.

By contrast, companies that produce or sell the staples of day-to-day living -- everything from food to toothpaste -- are estimated to show a 5 percent increase in earnings from last year, according to the report. Other groups expected to see modest profit increases are health-care companies, up 6 percent, and utility companies, up 4 percent.

Most other sectors -- energy, industrials, materials, technology and telecommunications -- are expected to post double-digit declines from the 2007 fourth quarter. The biggest forecast drop, down 65 percent, is for the materials group, which has been slammed by the fall-off in commodity prices and demand.

A big question mark continues to hang over the financial sector, given ongoing constrictions in credit markets and all the related government efforts to prop up the group. Financials on the whole posted a loss a year ago, and the report shows analysts are unclear whether the outlook has improved at all from then.

(Reporting by Daniel Burns; Editing by Leslie Adler)