Falling Q4 profit forecasts another negative for U.S. stocks

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By Caroline Valetkevitch

NEW YORK (Reuters) - After a disappointing third-quarter reporting period, analysts are projecting that fourth-quarter U.S. earnings will decline for the first time in two years as rising interest rates and slowing growth further dampen the outlook.

Estimates have been falling for 2023 quarters as well, and Goldman Sachs (NYSE:GS) recently cut its 2023 S&P 500 earnings per share growth forecast to zero, citing weakening profit margins.

As of Friday, analysts were forecasting a 0.4% fall in year-over-year fourth-quarter earnings for S&P 500 companies, according to IBES data from Refinitiv. That compares with the 5.8% increase they forecast on Oct. 1.

The last time there was a quarterly decline in S&P 500 earnings was in the third quarter of 2020, when companies were still reeling from the initial shock of and disruptions caused by the coronavirus pandemic.

The weakening profit outlook only adds to worries for investors, who have been concerned that aggressive interest rate hikes by the Federal Reserve to control inflation could lead to a recession. The S&P 500 is down more than 17% for the year-to-date.

"Third-quarter earnings, they missed expectations. But what we've been focusing on really is 2023," said Michael Mullaney, director of global markets research at Boston Partners in Boston.

"For the Fed to achieve their inflation targets, they're going to have to push the economy into a recession," which means 2023 profit estimates "have to come down a lot more," he said.

Technology and tech-related companies have accounted for more than half of the negative S&P 500 profit revisions for the fourth quarter, Jonathan Golub, head of U.S. equity strategy and quantitative research at Credit Suisse, wrote in a recent research note.

Several of the big tech and growth companies including Amazon.com (NASDAQ:AMZN) and Facebook (NASDAQ:META) parent Meta Platforms hit investors with big disappointments for the third quarter and gave disappointing forecasts for the fourth quarter.

Rising Treasury yields have pressured shares of tech and growth companies especially hard.

Top retailers were also among those reporting disappointing results, led by Target (NYSE:TGT), although Walmart (NYSE:WMT) delivered cheer to investors.

With results in from 475 of the S&P 500 companies as of Friday, third-quarter earnings are now estimated to have increased just 4.2% from a year ago. That is weaker than the 4.5% gain predicted at the start of October, based on Refinitiv data.

Estimates for future earnings tend to fall as companies give guidance, but strategists said the declines this time have been larger than usual.

Analysts expect S&P 500 technology sector earnings to drop 7.8% in the fourth quarter, compared with a gain of 1.0% forecast on Oct. 1. Earnings for the communication services sector are predicted to fall 20.9%, compared with a 9.2% decline forecast on Oct. 1, per Refinitiv data.

Overall, seven of the 11 major S&P 500 sectors are expected to show a decline in fourth-quarter earnings from the year-ago period, based on the data.