By Leah Schnurr
NEW YORK (Reuters) - The last quarter of 2008 is set to rack up the steepest decline in earnings for U.S. companies in at least 10 years, as deep write-downs from banks mounted and companies across a wide swath of sectors slashed their outlooks.
Although analysts slashed their expectations ahead of what was widely expected to be a bleak earnings season, earnings still came in well below expectations, suggesting Wall Street had failed to get its arms around the scope of the economic crisis.
And the pain is seen as far from over. Expectations for the coming quarters have been dampened as companies have slashed their own outlooks as they warn of slumping sales and job cuts.
Investors who at the end of December had expected earnings growth to return in the third quarter, according to Thomson Reuters data, now do not see a return to growth until the fourth quarter .
"We did not appreciate the severity of it, -- just about everyone out there on the Street, whether the economists or analysts or corporate governments," said Howard Silverblatt, senior index analyst at Standard & Poor's in New York.
Among the big companies highlighting the depth of the economic gloom, Citigroup
For the final quarter of 2008, earnings for companies in the broad S&P 500 are calculated at having fallen by more than 40 percent, which combines already reported numbers and estimates for companies yet to report.
This is sharply lower than the decline of 1.2 percent that was expected at the beginning of January, and a huge turnaround from October's expectations for growth of 46.7 percent.
If the earnings season finishes at this level, it will be the worst quarterly performance since Thomson Reuters began tracking the data in 1998.
Now, expectations for the first and second quarters have also been ratcheted down. Earnings in the first quarter are seen declining by almost 30 percent, compared to a decline of only 10 percent decline predicted at the end of December.
Second-quarter earnings are expected to fall nearly 26 percent, compared to the 2.7 percent drop forecast in December.
Financials have seen the worse performance in the fourth quarter, unsurprising for a sector that has continued to post deep losses and write-offs as it grapples with the credit crisis that has changed the financial landscape.
Silverblatt said the financials have done twice as poorly as last year, losing $52 billion in the fourth quarter compared to a loss of $23 billion in the same quarter the year before.
If the banking sector were removed from the index altogether, the decline in earnings for the remaining groups would be just over 19 percent.
"Even though many of the banks will have more write-downs to come, I think they were trying to take the lions' share of write-offs that they could," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco.
Showing how widespread the downturn has become, seven of the S&P's 10 sectors are poised to finish the quarter with declining earnings, making it the first time that many sectors have finished in the negative since the fourth quarter of 2001 as the tech bubble was evaporating and the economy suffered in the wake of the September 11 attacks.
The materials sector has had the second-worst performance, while the consumer discretionary group comes in third, underscoring slowing spending by cash-strapped consumers.
The corporate malaise is expected to continue with analysts anticipating the declines to stabilize before returning to growth in the fourth quarter, although some have questioned whether the anticipated second-half recovery will materialize.
"The numbers have to get better because the comparisons are getting so much worse," said Silverblatt. "But to say I'm going to do better than a $52 billion loss does not mean I am anywhere near out of trouble."
Defensive sectors have fared better, with health care, consumer staples and utilities showing growth. The groups are typically viewed as better able to weather the economic storm because they provide products that consumers are unlikely to skimp on.
As of last week, of the 309 companies on the S&P that have reported results, 58 percent beat expectations, 34 percent fell short and 10 percent were in line.
(Editing by Leslie Adler)
