Dell, the world's biggest personal computer maker, issued a surprising profit warning late Monday, pressuring technology stocks in early trading Tuesday. The tech-heavy Nasdaq composite index, for instance, was down more than 10 points at the open this morning even though the broader stock market opened higher.
Biz Buzz: A daily update on economic and business news
Archive: A comprehensive listing of Biz Buzz columns
But while Dell's weaker-than-expected third-quarter guidance raises concerns about the health of the U.S. consumereconomy, it also highlights a hidden problem in the overall corporate profits picture.
Up until now, many on Wall Street had been focused on how strong corporate earnings have been in the third quarter. Despite the economic disruptions caused by Hurricane Katrina in September, companies in the Standard & Poor's 500 index are expected to report profit growth of 15.8 percent in the third quarter. That's up from 11.7 percent in the second.
But dig a little deeper and you'll spot some worrisome trends. For example, while that 15.8 percent forecast for third quarter results sounds good, it's actually much lower than it had been several weeks ago. At the end of September, many Wall Street analysts were predicting that S&P 500 earnings would actually climb as much as 17.9 percent.
Furthermore, most of the gains in third-quarter earnings are coming from just one sector—energy, where profits are up 65 percent thanks to record-high oil and natural gas prices. If you strip out energy from the third-quarter results, profits would be expected to climb a much more modest 10.4 percent.
Meanwhile, revenue growth is also starting to slow, as more and more companies like Dell are reporting a shortfall in sales in addition to profits. Indeed, quarterly revenue growth among S&P 500 companies has fallen to around 10 percent in the second quarter after peaking at 13 percent in the fourth quarter of 2004.
Bob Doll, chief investment officer for Merrill Lynch Investment Managers, notes that roughly two thirds of companies in the S&P 500 have reported their third quarter results and that about two thirds of them have reported better-than-expected numbers. "When you do a little careful analysis, however, you find that the positive surprises were small," Doll said. "And, while there have been fewer of them, the negative surprises have been bigger."
"As a result," he added, "the overall earnings season is not as healthy as had been the case."
Biz Buzz wraps up the day's market news and offers an agenda of upcoming economic news.
