Confession Season Bodes Well for Fourth Quarter

A mild confessional season is usually a good sign for upcoming earnings, and this time around, it could be foreshadowing one of the best quarters for corporate profit growth in more than a decade.

Fourth-quarter profit warnings have been few and far between in the last couple of months, with just 1.3 negative outlooks released for every positive forecast, according to earnings tracker Thomson First Call. This 1.3 ratio is considered unusually low and bodes well for the reporting season, which kicks off in earnest next week.

"We're still seeing some follow-through from the momentum that was built up in the third quarter," said Ed Peters, chief investment strategist at PanAgora Asset Management.

In the past few months, just a handful of high-profile names have lowered their estimates, including GatewayGTW, Eli Lilly LLY and HoneywellHON.

In general, warnings have been concentrated in the energy, materials and industrial segments, but even here, the disappointments have been relatively benign.

Meanwhile, some big firms such as FordF, QualcommQCOM and Federal Express FDX have raised their guidance, and companies such as Bear Stearns BSC and OracleORCL already have beaten analysts' estimates by a comfortable margin.

The absence of any truly bad news so far has led First Call's Chuck Hill to predict earnings growth of 26% in the fourth quarter, the best performance since a 30.3% rise in the third quarter of 1993. In the third quarter of 2003, earnings rose 21.5%. Still, Hill believes this kind of growth is unsustainable, because he says it has been fueled largely by temporary fiscal relief.

"Because of the stimulus-driven earnings surge in the third and fourth quarters, it is still difficult to determine what the underlying earnings trendline is for this recovery," he said. "We continue to believe it will be more gradual than the recovery from recent recessions and more gradual than the current economic data is leading some investors to expect."