Foreign Troubles Dim US Earnings Forecasts

Expected earnings of U.S. companies on the S&P 500 reflect the gloomiest outlook in over a decade. Weakening overseas operations of U.S. firms across sectors, as an offshoot of a declining euro currency union, depressed demand in Europe and China and high currency exposures are taking a toll on corporate earnings, analysts say.

Thomson Reuters and FactSet Research Systems (Nasdaq: FDS), a Connecticut-based analytics firm, have come up with different estimates. However, the projections of both organizations suggest the same trend: U.S. earnings are trending downward because of troubles outside the U.S.

Negative Earnings Outlook

According to a Thomson Reuters study of 85 S&P 500 companies, nearly 45 percent of organizations that were surveyed cited headwinds from Europe, currency movements and the deteriorating global economic environment as negative influences on their earnings.

Thomson Reuters data suggests that earnings will decline 0.4 percent if consumer tech giant Apple's (Nasdaq: AAPL) growth and the Bank of America's (NYSE: BAC) poor first-quarter performance are excluded from the forecasts. Revenues will rise only 1.7 percent in the second quarter.

In another related study conducted by FactSet Research Systems on 102 S&P 500 companies, 74 companies have issued a negative earnings guidance. FactSet analysts say that this trend is worse than it was in the previous quarter. Of the 102 companies studied this quarter, only 28 remained optimistic about their earnings as against 44 companies that reflected an upbeat outlook in their forecasts among the 111 respondents surveyed last quarter.

While Thomson Reuters predicts an earnings decline of 0.4 percent in the second quarter, FactSet Research estimates the same-period earnings growth rate at 3 percent, down from 3.1 percent last week. Since the start of the second quarter, the blended earnings growth rate -- a measure that FactSet uses to calculate growth over a period of years -- for the S&P 500 index slumped to 3 percent from 6.4 percent in the previous quarter, a FactSet Research analyst report stated.

Industry Comparisons

Nine out of ten sectors recorded an earnings decline during the second quarter.

Estimated earnings for the financial services sector slid 2.3 percent during the past week, mainly because of poor earnings expected for Goldman Sachs and Morgan Stanley.

The telecom sector, which saw a slight rise in its projected revenue growth since March 31, is the only silver lining in the cloud -- a trend that makes tech stocks a safer destination for investors, analysts say.

Energy and basic metals companies, which are presumed to fare the worst, are expected to post a sequential decline of 19.3 percent and 11.9 percent in their earnings respectively. A sharp fall in global commodity prices might affect their bottom lines further.

Banks Exposed

Goldman Sachs

Analysts have made a downward revision of Goldman Sachs' (NYSE: GS) earnings per share (EPS), following Moody's credit downgrade last month -- a move that left markets unsettled and could next hit the bank's bottom-lines. The mean EPS estimate for the New York-based investment bank dropped 16.5 percent to $1.61. Core trading at the bank could slip as much as 32 percent, according to a report by JMP Securities, a full-service investment bank.

Morgan Stanley

Morgan Stanley's (NYSE: MS) earnings forecast is more dismal. FactSet Research Systems revised the bank's mean EPS to $0.39 from $0.46.

Morgan Stanley, also among the 15 banks that Moody's downgraded last month, slashed its forecasts on commodity-linked currencies on Tuesday because of an unstable global economic environment. The bank made the biggest haircuts in its estimates for the UK pound sterling and the Australian, Canadian and New Zealand dollar against the U.S. dollar.

Declining growth indicators and a muted policy response are likely to leave the high-beta currencies in a vulnerable position, in our view, as policy measures are unlikely to be enough to lift risk appetite, but instead will likely undermine support for currencies where policy is eased further, Ian Stannard, Morgan Stanley's head of European foreign exchange strategy wrote in a research note.

The regional banks, which are not as dependent on foreign sources for income, appear to be faring better, according to Richard Bove, a financial analyst at Rochdale Securities. We are expecting regional banks to report good earnings and trust banks to post mediocre figures, he said.

Concerns Abroad

Non-U.S. operations determine nearly 50 percent of the earnings of S&P 500 companies.

Computer-maker Hewlett-Packard (NYSE: HPQ), tech firm NetApp Inc. (Nasdaq: NTAP), consumer goods giant Procter & Gamble (NYSE: PG) and coffee chain operator Starbucks (Nasdaq: SBUX) were among the companies that cited Europe as an overhanging culprit for what they said could well be bleak revenues. Procter & Gamble (NYSE: PG), which is floundering in a sea of unfavorable foreign exchange rates and weaknesses in developed markets outside the U.S., has cut its fourth-quarter earnings forecasts to a range of 75 to 79 cents per share from its prior estimate of 79 to 85 cents.

In mid-June, Ford Motor Co. (NYSE: F) indicated that losses from its operations outside the U.S. could triple the $190 million it posted in the first quarter in the face of economic turmoil in Europe.

Furthermore, a rise in the dollar against the euro could hit the dollar earnings of companies by making U.S. products less competitive abroad. The euro fell 5.2 percent against the dollar in the second quarter.

Slowing demand in China is another albatross around the necks of companies, especially those in the consumer manufacturing sector. The main problem in China is a decline in European demand for its exports -- a trend that is giving U.S. companies a nosebleed in their sales volumes by eating into their existing and potential business opportunities with factories in China.