Earnings slowdown: Blame energy

NEW YORK (CNNMoney.com) -- Earnings growth has been slowing, and there's only one solution. Bring back really high oil prices.

With roughly two-thirds of the S&P 500 already having reported fourth-quarter earnings, results are on track to have grown about 10.4 percent from a year ago, according to Thomson Financial. That's a blended figure, combining reported and forecast earnings.

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That also means the fourth quarter - if forecasts hold up - should mark the 14th consecutive quarter of double-digit earnings growth.

Not so bad, right? The historic average Thomson Financial looks at is 7.5 percent, so 10.4 percent is better. But it gets worse from here on out. As of Feb. 5, first-quarter 2007 earnings growth is expected to slow to 5 percent.

While there are a number of reasons - projections of a slower growing global economy, tougher comparisons after several years of strong growth - the biggest reason for dwindling earnings growth at the moment is the turnaround in the energy sector.

"Energy is the big issue," said John Butters, senior research analyst at Thomson Financial. "Energy was one of the best performing sectors for the last couple of years, but now the comparisons have gotten tougher and the prices have dropped."

After surging for several years amid the expanding global economy and concerns about supply disruptions, crude prices peaked at above $78 a barrel last July.

Since then, crude has dropped 25 percent, even accounting for a bounce back in the second half of January. Gas prices have come down too, although not as much. Not only has this been a relief for consumers and helped the economy, but the decline in oil prices has coincided with and contributed to the latest run up in the stock market. The Dow industrials now stands just short of an all-time high.

Exxon Mobil (Charts)'s recent record quarter notwithstanding, the overall energy sector is expected to post a 10 percent drop in earnings in the fourth quarter versus a year ago. The sector hasn't posted an earnings shortfall since 2002.

Chevron (Charts) and Marathon Oil (Charts) both posted weaker results last week.

Granted, it's not all energy's fault. The consumer discretionary sector is having a hard time too of late too, largely because of Ford Motor (Charts), said Butters.

Financial sector earnings have picked up the pace recently, but that hasn't lifted the broader earnings outlook.

The financial sector is expected to post year-over-year growth in the fourth quarter of 34 percent. Strip that out, and overall fourth-quarter earnings would only be on track to rise 2.4 percent, instead of 10.4 percent.

With growth of 37 percent, the materials sector is also expected to have a good quarter.

But reported earnings have been beating forecasts by a lower percentage than in recent quarters. Of 315 companies that have reported, 64 percent have beat estimates, 16 percent have met and 20 percent have missed.

That trend has continued in terms of first-quarter projections, with less companies guiding higher and roughly the same amount guiding lower, Butters said.

Earnings for the energy sector are expected to fall 2 percent in the first quarter or 2007, dragging on broader earnings growth.

But downward revisions to technology and consumer earnings are also contributing. As of Jan. 1, the tech sector was forecast to post earnings growth of 17 percent, whereas now the growth is set at 12 percent.

The consumer sector was expected to see a decline of 1 percent at the time. Now the decline is pegged at 4 percent.

2007 earnings are currently on track to grow about 7.3 percent, down from a forecast of 9.3 percent on Jan. 1.

Should the numbers hold up, that would make 2007 earnings growth the slowest since 2002, when S&P 500 earnings grew one-tenth of a percent.

What does it mean for investors? Sustained slower earnings growth would contract price-to-earnings (P/E) ratios, making stocks more expensive - at the same time the aging bull market is contending with a slower growing economy. All of which means it could get tougher to profit in the stock market in the quarters ahead.