Corporate Outlooks Worse than During Financial Crisis

Earnings outlooks have turned markedly sour in recent weeks

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Priceline is one company with an outlook shaken by European troubles.

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The economy is slowly recovering, but pessimism appears to be widespread (and getting worse) among some of the country's top corporations.

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A recent report from business research company Thomson Reuters shows that the share of S&P 500 companies issuing negative earnings guidance—that is, projecting future earnings per share below analysts' expectations—has grown sharply. In the second quarter of this year, the ratio of negative to positive guidance was around 3 to 1, and in the prior three quarters it had been even lower. Now, for the third quarter of 2012, that figure jumped to 4.9 to 1, as of August 10.

According to the report, that ratio "surpasses even the depths of the financial crisis and, in fact, one needs to look back to the third quarter of 2001 to find a quarter when companies were more pessimistic about their ability to meet analyst expectations."

It is true that some share of this negativity could come from companies moving the earnings goalposts. According to Doug Roberts, chief investment strategist at investment firm Channel Capital Research, companies often dial back their projections in order to set themselves up to beat those projections.

"Even if things are bad, they can say, 'Things are terrible, but we beat expectations,' " says Roberts.

But the report notes that such a sharp increase suggests that pessimism may indeed be at work. According to one of the report's authors, foreign economic worries are a heavy weight on many of these companies' outlooks.

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"The most common reason is Europe. A lot of companies depend on foreign markets for growth. So Europe is one place a lot of companies in the S&P 500 have a lot of exposure to," says Greg Harrison, corporate earnings research analyst at Thomson Reuters, and one of the report's co-authors.

China—which recently cut its GDP forecast—may also be a drag on companies' outlooks, says Harrison.

"[China is] another big growth market for a lot of companies that are looking to expand outside the united states. Their growth is still very high, but not as high as expected," says Harrison.

One company that the report points to is online travel booking company Priceline, more than half of whose revenue comes from Europe. In his company's earnings call last week, that company's chief financial officer, Daniel Finnegan, cited European economic conditions as one reason why his company was dialing back its forecast.

There are other recent examples of corporate uncertainty. Netflix, for example, likewise issued a lower-than-expected outlook earlier this summer.

Of course, plenty of factors can drag on a company's outlook. As Netflix noted in its most recent earnings call, given just before the Olympics, the summer games could have been a drag on subscriptions.

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Whatever the reason for companies' gloomy forecasts, it's just more bad news for an American economy struggling to right itself.

"If the negative outlook of management is borne out," says the report, "it is likely that earnings will decline for the first time in the current economic recovery."

Danielle Kurtzleben is a business and economics reporter for U.S. News & World Report. Connect with her on Twitter at @titonka or via E-mail at dkurtzleben@usnews.com.