Earnings won't bail out market this time

NEW YORK - In Roman mythology, Janus is the god of doorways, and January is in turn the doorway of the year. For Wall Street, this first month of 2008 has brought none of the optimism that the myth implies — instead, a disappointing stream of economic and earnings reports has investors dreading what's still to come.

With investors worried that the credit crisis is worsening and that a recession is all but likely, the Standard & Poor's 500 index fell nearly 10 percent in the first 18 days of 2008. This month is shaping up to be the worst January on record for the well-tracked index since 1970, when blue chips shed 7.65 percent.

And Wall Street analysts warn investors not to expect corporate earnings to bail out stocks. About 60 members of the S&P 500 have reported results, most of them failing to surpass Wall Street projections.

"We keep waiting to see that other shoe drop, and so far corporate earnings are doing terribly," said Howard Silverblatt, S&P's senior index analyst. "Because of all the bank write-offs, the fourth quarter is basically history."

Major global banks and brokerages wrote down about $90 billion worth of bad debt during the fourth quarter because of exposure to risky subprime mortgage securities. And, more importantly, top banking executives still aren't willing to say they've reached bottom.

Disappointing results from financials like Citigroup Inc. and Merrill Lynch & Co. weighed on Wall Street this past week, and contributed to the market's huge swoon that took the S&P 500 down 5.4 percent and the Dow Jones industrials down 4.02 percent. There were some bright spots — both IBM Corp. and General Electric Corp. surpassed expectations and put investors at ease about their prospects for 2008 — but overall, the market's sentiment about earnings was bleak.

Silverblatt and other analysts believe investors should focus on what companies are saying about this year — not what happened during the last three months of 2007. What companies have to say about capital spending — money set aside for everything from buying computers to building new factories — will be a key indicator for how they feel about the future.

But while the market does look to the future, the disappointments of the fourth quarter — and companies including chip maker Intel Corp. were among them — can't help but pull investor sentiment down.

"I think it is unlikely to see a dramatic pickup in the number of companies beating expectations," said Michael Thompson, director of research at Thomson Financial. "I don't think it gets a lot worse, and I'm not sure I would try and raise expectations that ratio will improve dramatically."

But, he warns, "it's still early." With the bulk of the financial companies out of the way, there are still a little more than 400 blue chip companies left to report. Industry leaders like Apple Inc., DuPont Co., and Johnson & Johnson post results.

Analysts will also be examining contributions from overseas operations, which again are expected to be the biggest contributor to earnings during the quarter. The second half's profit decline would have been even sharper if it wasn't for robust international growth and weakness in the dollar.

Overseas earnings were up 20 percent year-over-year during the third quarter. And that might continue for some companies — especially since the Federal Reserve's series of interest rate cuts have caused the dollar to slide against its counterparts in Europe and Asia.

That's been a boon for companies like IBM, which does about 65 percent of its business outside of the United States. The company said Thursday its 10 percent revenue growth would have been cut to 4 percent if it wasn't for the dollar's rut.

But companies may not be able to depend on overseas operations to help their earnings for much longer.

"U.S. corporate earnings are not only susceptible to further downside pressure at home — they are also exposed to mounting problems overseas, notably in Europe," said Joe Quinlan, Bank of America's chief market strategist of global wealth. "Remember, in the face of deteriorating earnings in the U.S. last year, robust global earnings saved the day."