US opens reporting season with the jitters

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Investors in the US are bracing themselves for a volatile period over the next fortnight, as most of the country's biggest companies release their latest results – and set out their expectations for the year and beyond.

This earnings season is shaping up to be the most nerve wracking for many years, after a string of profit warnings in the run-up to its start and disappointing figures from the first major corporations out of the gate this week.

And it comes against the backdrop of reduced forecasts for economic growth in the fourth quarter of this year and for 2008. Investors hope that, when the reporting season is through, they will have a clearer picture of how the US consumer has been affected by the slump in the housing market, and whether American companies are finding record-breaking growth overseas to make up for sluggishness at home.

While the equity markets have been trading at record levels this week, the Dow Jones Industrial Average slipped yesterday as traders became less sanguine.

Already, analysts have become sharply more pessimistic, a trend that accelerated in the past few days. In July, expectations for third-quarter corporate earnings growth was at an average of 6.2 per cent, but that had already fallen to 3.6 per cent by the start of this month. Following big profit warnings in the financial sector, which has been hit by the debt market crisis, average earnings growth for the S&P 500 companies is now expected to be just 1.4 per cent.

The real test will not be whether those modest expectations are met, but whether the current optimism for the final three months of the year is borne out. Analysts currently expect earnings growth to snap back to about 11 per cent in the fourth quarter.

"Shares of housebuilders and mortgage companies have already been taken out to the woodshed," says Tobias Levkovich, the chief equity strategist at Citi, "but the selling hasn't been across the board."

Chevron, the oil giant, issued a last-minute profit warning on Tuesday and results from the agriculture business Monsanto and the aluminium producer Alcoa missed forecasts. But traders say that the slew of results from retailers next week will be more important, along with figures from global economy bellwethers such as General Electric. On the technology front, Google's third quarter results are due a week today, and will reveal whether the internet firm's recent share price surge over $600 has been justified.

Although no formal earnings guidance will be given for 2008 at this stage, companies may hint at the longer-term outlook, and investors will certainly be pressing for clues in the current nervous environment. Yesterday, the monthly survey of economists by the Blue Chip Economic Indicators newsletter showed that forecasters trimmed their figures for 2008 GDP in the US for the third straight month. Minutes of the most recent interest rate-setting meeting of the Federal Reserve revealed that the central bank had cut its own internal forecasts for economic growth this year and next.