Profit gains earned through job cuts and factory closings in the absence of a global economic recovery are starting to reach their limit.
Third-quarter profits and sales for the Standard & Poor’s 500 Index (SPX) probably fell in unison for the first time in three years, according to analysts’ estimates compiled by Bloomberg. Per-share earnings may have dropped 1.7 percent on average after they were little changed in the second quarter. Sales may have slipped 0.6 percent, the data show.
While most companies plan to keep a lid on spending, lower expenses aren’t leading to the same kinds of increases they reported earlier this year. Hewlett-Packard (HPQ) Co., the world’s largest personal-computer maker, already forecast full-year profit that trailed analysts’ estimates, FedEx Corp. (FDX) cut its annual earnings forecast and Intel Corp. (INTC) projected lower third- quarter sales, with all three citing softening demand.
“A lot of the earnings growth that we’ve seen has been related to cost reductions,” said Peter Jankovskis, co-chief investment officer for Oakbrook Investments in Lisle, Illinois, which manages more than $3 billion. “Now many of those cost reduction efforts have run their course. Without revenue growth, there is no room for profit to expand further.”
Alcoa Inc. (AA), the largest U.S. aluminum maker, kicks off the third-quarter earnings season tomorrow and is projected by analysts to report a 13 percent drop in sales, the biggest drop in three years, on plunging prices for the commodity. That may wipe out per-share earnings, according to estimates.
