ALL BUSINESS: Earnings estimates may be wishful thinking

Look at their forecasts for the second half of 2008: Profit gains for Standard & Poor's 500 companies in the third quarter are expected to top 14 percent and the fourth quarter could bring a year-over-year surge of 55 percent. That sure sounds like a happier economic world than the one we are living in right now.

It also sounds like wishful thinking, so don't break out the champagne yet.

General Electric Co.'s massive profit miss on Friday should be reason enough to be wary about optimistic views for the rest of this year. The conglomerate, which is considered a proxy for the overall economy, reported first-quarter earnings per share from continuing operations of 44 cents compared with analysts' estimates of 51 cents.

The earnings miss shows how the credit crisis and global economic downturn aren't just hurting financial businesses, but have infected health care and consumer products, too. The Fairfield, Conn.-based GE, which typically hits its earnings targets, also revised its earnings outlook for the year to a gain of no more than 5 percent, down from double-digit projections a month ago.

"We assume the economy is going to be very tough and remain very tough," GE CEO Jeffrey Immelt said during a conference call with analysts.

GE isn't alone. In recent days, Alcoa Inc. and Wachovia Corp.'s results both came in below expectations, while UPS Inc. and J.C. Penney Co. revised their first-quarter outlooks down significantly.

It's possible that analysts' estimates may be way off for the first quarter, even though they've been revising them down for months. Back on Jan. 4, analysts were forecasting a year-over-year 4.7 percent gain in S&P 500 earnings. By Feb. 15, that turned negative, with a 1.4 percent decline expected. A month later, that was extended to a 7.8 percent fall and at the end of March, it tumbled to a 9.9 percent pullback, according to Citigroup.

The percentage of companies beating earnings estimates which Bespoke Investment Group says is a gauge of the market's health has been on the decline since the third quarter of last year. In the fourth quarter, about 60 percent of companies topped analysts' estimates, still well above the 50 percent level seen during the bear market of 2001 and 2002, according to Bespoke.

But that "beat" rate could drop if analysts' estimates stay high, despite no evidence that the economy has or will soon turn it course. Federal Reserve Chairman Ben Bernanke recently acknowledged for the first time that a recession was possible. Most economists believe growth contracted in the first three months of this year and will continue on that path due to the slump in housing and the pullback in consumer spending.