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NEW YORK (CNN/Money) -
What looks to be shaping up as a strong earnings season still has Wall Street scared to death.
Bellwether companies like Intel (Research), Pfizer (Research), Nokia (Research) and eBay (Research) report earnings that meet or beat analysts forecasts. But some cautions from those companies on future results seem to be all it takes to spark a sell-off in their shares, and the broader market.
Pfizer, which reported Thursday morning, beat analysts' forecasts but lowered its guidance for 2005 and pulled its profit targets for 2006, sending its stock tumbling 8 percent.
"The impact of higher energy prices is starting to bite corporate America. It's either going to raise costs or lower demand," said Anthony Chan, senior economist for JPMorgan Asset Management.
But it's not just energy prices, which have actually been falling recently, that has the markets spooked. Investors are also worried about rising interest rates, less confident consumers and the risk of the housing bubble finally bursting. And they seem to be seizing on anything that isn't a sky-is-the-limit outlook to sell some stock.
The guidance from the companies hasn't been particularly bad. For instance Intel is telling investors that it sees fourth quarter revenue between $10.2 billion and $10.8 billion. That's up from $9.6 billion a year earlier and could be higher than the $10.7 billion consensus forecast at the time of the guidance.
"The markets are looking for the bad news in general," said David Kelly, economic advisor to Putnam Investments. "It really reflects is the enormous hit that consumer confidence took in September and that feeds into the markets right now," he said. "If investors were in a better mood, they'd shrug off a lot of these things."
The guidance from eBay was for earnings of 21 cents a share excluding items in the fourth quarter, up from the 16 cents a share it earned a year ago but a penny a share below the previous consensus forecast.
"The fourth quarter is when we'll see the impact of rising interest rates, higher energy prices," said Art Hogan, chief market analyst at Jefferies & Co. "I would say eBay is the biggest piece of the problem this morning. It's a household name and it's adding to the sentiment we're not going to have the best of fourth quarters."
Are fears overstated?
Dave Dropsey, research analyst for earnings tracker Thomson Financial First Call, said he believes the markets are focused too much on pretty typical cautions from companies, especially considering how strong earnings have been. First Call still sees earnings per share growth of 16.4 percent in the fourth quarter, which would be roughly the same gain likely for the just completed third quarter. It would also make the 10th straight quarter of better than 10 percent EPS growth.
"I understand that the markets look ahead, but how long can you keep saying 'We're worried about the next quarter.' Honestly, companies are always being as conservative as possible about the quarter ahead," said Dropsey.
Dropsey said that with about a quarter of the S&P having reported third quarter results, 71 percent have beaten estimates. He said that even with higher energy costs and interest rates, corporate earnings are poised to continue to have double-digit growth into at least the third quarter of 2006. The worries have cut the 12-month forward price/earnings ratio for the S&P 500 to 14.1, Dropsey said, down from 16.3 at the start of the year.
"You can point to high energy prices, but the same arguments were there a year ago. Then the numbers come out and crush all those fears, but the markets don't respond," he said. "At what point do we put the fears to rest for a little while?"
Chan also agrees that markets may have oversold on energy and interest rate concerns. He expects a rally in the fourth quarter, especially as the Federal Reserve sends more signals about when it will finally stop raising rates.
"I think even with the head winds on earnings, when we get into the fourth quarter the view will be what is going to happen in '06," he said. "If they see clarity from central bank that will be enough to give you a lift."
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