Financials sweat out earnings season
The nation's banks and brokers have a new lament: Everyone is making money but us.
Roughly half the companies in the Standard & Poor's 500 have reported fourth-quarter earnings so far, and the results show a stark distinction between the struggling financial sector and a relatively strong performance in other parts of the economy.
Overall, of the 237 companies in the Standard & Poor's that have reported so far, earnings are down 19.4 percent, says Reuters Estimates. S&P, which measures results slightly differently, says earnings are down 21.0 percent - the biggest decline in profitability in six years.
Strip out the financial sector, though, and the results show earnings grew 11.4 percent, says Thomson Financial. That's 52 percent greater than the long-term average growth rate in earnings, Thomson says.
"Financials' (earnings) have been really bad and that's wrecking the party for everyone else," says Ashwani Kaul of Reuters Estimates.
In addition to dragging down the S&P 500's earnings, financials have been the unwelcome guests during reporting season in that they're:
- Coming in worse than expected. Nearly two-thirds of financial companies have missed estimates, says John Butters of Thomson.
Not only is that unusual for the sector, but it's also a big reason why 25 percent of the companies in the S&P 500 have missed targets. Generally, 20 percent of S&P 500 companies miss estimates.
- Generating massive losses. Financials have lost $58 billion more during the quarter than they earned in the same year-ago period, says S&P's Howard Silverblatt. That's about a third of the $146 billion economic stimulus package nearing approval in Congress.
Such giant losses weigh heavily on the earnings from the S&P 500 because financials are the No. 1 most valuable sector, accounting for 18.5 percent of the market value.
Because of financial stocks' massive losses, overall earnings are expected to fall 3.5 percent in 2008, S&P says. That's down sharply from the 7.7 percent growth expected six months ago. "The speed at which this has hit has surprised everyone," Silverblatt says.
- Delivering a drumbeat of sour news. The problems in the financial-services industry surfaced again Wednesday when Swiss banking giant UBS reported a record $11.4 billion loss after it wrote off $14 billion related to subprime mortgages.
Investors, though, shouldn't assume the pains in financials are in a vacuum, says Jack Ablin of Harris Private Bank. Banks are just the first to suffer from an economic slowdown that will spread. The fact the S&P 500 fell 0.5 percent Wednesday despite a half a percentage point cut in interest rates shows there's still concern. "Financials were first to pick it up," Ablin says. "But (other sectors) will have subpar growth for a couple of years."
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