Oct 08, 2012, 08.21 AM IST
Wall Street may be bracing for a pullback as US earnings season begins next week - if the clouds of profit warnings from bellwethers ranging from FedEx to Hewlett-Packard lead to a downpour of lower profits - or even losses.
Thanks to aggressive stimulus plans from central banks around the world, the Standard & Poor's 500 index gained 5.8 percent over the third quarter. That sharp rally occurred even as companies were struggling. Earnings for that period are forecast to fall 2.4 percent from the year-ago quarter. If that happens, this would be the first earnings decline in three years, according to Thomson Reuters data.
Market strategists and investors say US stock valuations are broadly out of sync with earnings estimates. They forecast a pullback in stocks in the coming weeks as more companies report results and reduce expectations for the fourth quarter and beyond.
Fourth-quarter estimates for S&P 500 companies show a 9.5 percent gain in profit from a year ago, according to Thomson Reuters data. Analysts say that outlook is too high, given what investors are already hearing from the corporate world.
"It's a divergence right now where the valuations as far as equity prices (are concerned) have soared, and are really putting in place a stronger economy and stronger fundamentals," said Alan Lancz, president of Alan B. Lancz & Associates Inc., an investment advisory firm in Toledo, Ohio.
"But earnings will be the telltale sign," Lancz added. "And if the guidance isn't particularly strong, the market might be setting itself up for a little disappointment. I don't see a major correction, but I do see a pullback."
The earnings season will kick off on Tuesday with results from Dow component Alcoa
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