U.S. earnings started the quarter on the wrong foot, and things have only gotten worse.
Expectations for the third quarter were dismal, with forecasts for a decline in profits from a year ago. But a recent flurry of high-profile reports has investors scowling at the weak revenue numbers, adding to worries about the state of the U.S. economy and the outlook for corporate America.
"The earnings season is not looking very bright," said Larry Peruzzi, senior equity trader at Cabrera Capital Markets Inc., in Boston.
International Business Machines, General Electric and Microsoft fell short of revenue expectations, creating a sour mood early in the third-quarter reporting period. The third quarter is among the most important for investors and economists because it is when companies begin to give a better picture of what the following year may look like.
IT'S RAINING NUMBERS
The pace of earnings reports will accelerate next week, with eight Dow components and 155 S&P 500 companies scheduled to release results. Tech heavyweight Apple Inc. will be among them.
Just 38 percent of S&P 500 companies beat expectations on revenue in the past week, compared with 41 percent since the start of the reporting period, and well below the 62 percent long-term average, Thomson Reuters data showed.
On the earnings side, the data has been slightly more upbeat: 62 percent of companies that reported this week beat expectations versus 60.3 percent since the start of the earnings period, and the 62 percent long-term average, the data showed.
Investors have sold off shares after weak results, and more profit taking may be in store for stocks, given the big gains they've seen since the start of the year, Peruzzi said.
Friday's sell-off gave Wall Street its worst day in four months. The market's decline came on the 25th anniversary of Black Monday, when the Dow Jones industrial average plunged 22.6 percent in its worst one-day percentage loss ever.
The S&P 500 ended the week up just 0.3 percent. That's a modest showing when compared with its gain of 2.3 percent in the first three days alone.
For the year, the benchmark S&P 500 Index is still up 14 percent.
Much is riding on Apple, especially given the weakness in technology earnings so far this reporting period. Besides IBM and Microsoft, Intel and Google disappointed Wall Street with their results this week as well. Google's big miss came as a shock to many investors.
Apple "is certainly a bellwether, and today more than any other stock, sets the mood for investors," said Lawrence Creatura, portfolio manager at Federated Investors in Rochester, New York.
Besides Apple, results are expected next week from Caterpilla, Yahoo , United Parcel Service and Whirlpool .
THE UGLY TRUTH
Based on results from 116 companies and estimates for the rest, earnings for S&P 500 companies are expected to decline 1.8 percent from a year ago - the first such decline in three years. Without Apple, that decline would be about 2.3 percent, according to Thomson Reuters earnings analyst Greg Harrison.
Outlooks from U.S. companies have added to worries.
So far for the fourth quarter, there have been 17 negative outlooks from companies, no positive outlooks and one in line. That compares with 11 negative outlooks, two positive outlooks and two in line at a comparable period for third quarter guidance, Thomson Reuters data showed.
"Now is when the truth is revealed," Creatura said. "Now is when management teams begin to bracket what 2013 results might look like."
FED TO GRAB ATTENTION
Taking some of the focus away from earnings next week will be the Federal Reserve's policy meeting on Tuesday and Wednesday. After last month's meeting, the Fed announced its third round of aggressive economic stimulus, causing stocks to rally despite a slew of earnings warnings.
While investors welcomed the Fed's plan for more economic stimulus, known as quantitative easing, the move underscored worries that the U.S. economy may be in worse shape than feared.
Worsening macroeconomic conditions, namely sluggishness in the U.S. economy along with a dramatic slowdown in Europe and weakness in China, have been among the chief reasons cited by companies in their warnings about earnings and revenue.
U.S. economic indicators to watch next week will include new home sales for September on Wednesday and durable goods orders for September on Thursday, followed by the first look at third-quarter GDP on Friday, as well as the final reading for October on consumer sentiment from the Thomson Reuters/University of Michigan surveys.