Earnings forecasts for U.S. companies are starting to feel the pain on Wall Street and in the broader economy as the odds of another recession rise.
Intense fear that global debt issues and stagnant growth cannot be resolved has pummeled market confidence in the past couple of months.
Earnings have been one of the market's few positives, coming in strong despite economic woes.
But analysts now are toning down double-digit growth targets for the rest of this year and next on the heels of a record second quarter.
A distressing signal came from FedEx Corp
Since July 1, the Standard & Poor's 500 Index <.SPX> has lost 15 percent. Forecasts for third-quarter earnings for the S&P 500 companies have slipped to 13.7 percent growth from 17 percent, according to Thomson Reuters data. But many strategists say those estimates are still too high.
For next year, S&P 500 earnings-per-share estimates are eyeing $112, which would be a record.
If that number is anywhere near real, order the champagne now, said Howard Silverblatt, a senior index analyst at S&P.
Over the last few weeks, analysts have cut earnings estimates for S&P 500 companies across all sectors except technology. Financials are among the hardest hit.
Negative guidance from companies is also on the rise, outweighing positive guidance by a ratio of more than 2-to-1.
Estimates for the fourth quarter and 2012 are down slightly to around 15.4 percent and 13.5 percent, respectively, and could pull back further as analysts react to more guidance, as well as to critical economic data, including housing and jobs numbers, and a worsening debt crisis in the euro zone.
Profit growth could still be relatively strong for the season that kicks off in early October, and that could lift stocks, which sold off nearly every day last week on panic reminiscent of the financial meltdown in 2008.
The Dow Jones industrial average <.DJI> ended the week down 6.4 percent, its largest weekly percentage loss since October 2008, while the S&P 500 fell 6.6 percent. The Nasdaq Composite Index <.IXIC> tumbled 5.3 percent for the week.
The way things are going, we're going to be in a recession by the end of the fourth quarter, Barton Biggs, managing partner of New York-based Traxis Partners, said in an interview with Reuters Insider.
The mystery lies beyond the third quarter into next year. Strategists speculate that estimates may be inflated 5 percent to 15 percent as the market questions how far the cost slashing since the last recession can shield the bottom line.
FINANCIALS: THE ACHILLES' HEEL
Financials, worth more than 13 percent of the S&P 500 and the second-most influential group behind technology stocks, have been subjected to drastic cuts in earnings estimates.
That's obviously the Achilles' heel of the market, said Robert Van Batenburg, head of equity research at Louis Capital in New York. Investment banking is probably going to be very moribund, bank lending is still not existing, and there are no gains to be booked at all.
Banks are also suffering from worries about possible write-downs of euro-zone debt and less profitable lending due to the U.S. Federal Reserve's new measures to lower longer-term interest rates.
Financial institutions' shares have been dragged lower in recent days on renewed fears of exposure to European debt. Credit-default swaps, a measure of the cost of insurance against default on long-term debt, have been climbing.
The wild card here is really the banks. That's really where the earnings for the S&P have been kind of jerked around in the last couple years, said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co, in San Francisco.
Insurers are also very susceptible to a lower-rate environment, while energy and consumer discretionary sectors are vulnerable to see-sawing commodity prices and damaged confidence.
For the country's biggest insurers, the Fed's Operation Twist, designed to stimulate credit for consumers and businesses, could threaten earnings for years to come. The problem is, returns on insurers' investment portfolios cannot keep pace with the obligations they have accumulated from torrid sales of annuities and life policies.
TECHS BUCK TREND
Tech, meanwhile, has been the sector where forecasts are rising behind powerhouses such as Apple
The forecast for technology earnings for the full-year 2011 is 16.6 percent growth, compared with 2010, according to Thomson Reuters data released on Friday. In July, the forecast called for growth of 13.7 percent.
Yet even in this healthy sector, a cautionary tale came this week from chipmaker Xilinx
And after a relatively quiet few days on the economic calendar, the flow of data will pick up this week with reports on housing, factory activity, consumer spending and the broader economy. New home sales for August are due on Monday, followed by the consumer confidence index on Tuesday, durable goods orders for August on Wednesday, and the final reading on second-quarter GDP growth on Thursday.
On Friday, August personal income and spending data will come out, as well as the final reading on September consumer sentiment from the Reuters/University of Michigan surveys.
(Reporting by Claire Sibonney; Editing by Jan Paschal)