NEW YORK - US companies are sounding the alarm on fourth-quarter earnings, lowering profit estimates just as the stock market is poised to end its best year since 1998.
The ratio of profit warnings to positive outlooks for the current quarter is shaping up to be the worst since at least 1996, based on Thomson Reuters data.
More warnings may jolt the market next week, but market watchers say this trend could be no more than analysts being too optimistic at the beginning and needing to adjust downward.
Stocks rallied on Friday after a stronger-than-expected US payrolls report and ended nearly flat on the week after eight straight weeks of gains. The Standard & Poor's 500 index is up 26.6 per cent for the year to date, on track for its best yearly gain in 15 years.
"There's a natural tendency on the part of Wall Street in any given year to be overly optimistic as it relates to the back half of the year ... It isn't so much the companies' failing, it's where Wall Street has decided to place the bar," said Matthew Kaufler, portfolio manager for Clover Value Fund at Federated Investors in Rochester, New York.
So any negative news about earnings may "already be in the stock prices," he said.
The market has rallied even though it is faced with the inevitable withdrawal of the Fed's stimulus, the drag on the economy of stubborn high unemployment and the threat of rising interest rates.
As the quarter heads to a close, economic data, including the upbeat November payrolls report, suggest the recovery is building momentum, so much so that some investors worry the Federal Reserve may begin curbing its stimulus sooner rather than later.
The signs of a strengthening recovery and uncertainty over when the Fed will act have overshadowed a lot of earnings news lately, and that trend is expected to continue.
US primary dealers surveyed by Reuters on Friday said they expect the Fed will start reducing its bond-buying programme no later than March. A handful of firms expect the central bank to take action as early as December.
The policy-making Federal Open Market Committee's next meeting is scheduled for Dec. 17-18.
Still, estimates for fourth-quarter S&P 500 earnings have fallen sharply since the start of the year when analysts were building in much stronger profit gains for the second half of the year.