Low Profit Expectations Lead to Stock Selloffs

Analysts have set low earnings expectations for large-cap companies, and investors are selling the shares of those that fail to beat them by wide margins.
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BOSTON (TheStreet) -- Investors have been debating the staying power of the bull market for months. Bears cite health care charges, looming tax hikes and a recent increase in new jobless claims as reasons to sell stocks.

Still, corporate earnings have exceeded expectations, just not by the wide margins that many investors had hoped for. Federal deficits and employment augur ongoing difficulty, but America's largest companies are capitalizing on international demand and newly streamlined costs.

Here's how the first-quarter results of large-cap companies are stacking up against analysts' estimates:

  • Citigroup (C) - Get Report sales beat expectations by 22%, adjusted earnings per share beat estimates by 7,100%. The stock rises 2.4%.
  • Alcoa (AA) - Get Report sales miss estimates by 6.6%, adjusted EPS beat estimates by 8.7%. The stock falls 1.6% since announcement.
  • CSX (CSX) - Get Report sales beat estimates by 4.4%, adjusted EPS beat estimates by 12%. The stock rises 4.1% since announcement.
  • Intel (INTC) - Get Report sales beat estimates by 4.6%, adjusted EPS beat estimates by 13%. The stock rises 3.3% since announcement.
  • JPMorgan Chase (JPM) - Get Report sales beat estimates by 6.7%, adjusted EPS beat estimates by 16%. The stock rises 4.1% since announcement.
  • Yum! Brands (YUM) - Get Report sales beat estimates by 3.7%, adjusted EPS beat estimates by 12%. The stock rises 2.6% since announcement.
  • Charles Schwab (SCHW) - Get Report sales miss estimates by 0.6%, adjusted EPS miss estimates by 7.4%. The stock falls 0.3% since announcement.
  • Advanced Micro Devices (AMD) - Get Report sales beat estimates by 2.4%, adjusted EPS beat estimates by 1,558%. The stock falls 3.5% since announcement.
  • Google (GOOG) - Get Report sales beat estimates by 2.1%, adjusted EPS beat estimates by 2.2%. The stock falls 7.6% since announcement.
  • Intuitive Surgical (ISRG) - Get Report sales beat estimates by 11%, adjusted EPS beat estimates by 24%. The stock falls 7.1% since announcement.
  • Bank of America (BAC) - Get Report sales beat estimates by 13%, adjusted EPS beat estimates by 189%. The stock falls 5.5% since announcement.
  • General Electric (GE) - Get Report sales miss estimates by 2%, adjusted EPS beat estimates by 32%. The stock falls 2.7% since announcement.
  • Mattel (MAT) - Get Report sales beat estimates by 2.4%, adjusted EPS beat estimates by 333%. The stock rises 0.4% since announcement.

The 12 bellwethers listed above beat sales estimates by 3.2% on average. In better times, that average would have catalyzed a rally. With issues such as tax hikes, budget crises and high unemployment still unresolved, analysts have been keeping estimates artificially low and investors have been dumping companies that don't beat them by wide margins.

The key Dow companies that have reported so far include Alcoa, JPMorgan, Bank of America and GE. The industrial titans have told us what we already know: Investment banks are killing it because interest rates are low and Wall Street is a ghost town. Anything consumer-related remains weak, but is improving modestly. And companies that sell tangible products, such as aluminum or turbines, are seeing demand recover. The

Dow Jones Industrial Average

has gained 0.8% since Alcoa kicked off earnings season on April 12.

JPMorgan boosted its fixed-income revenue 12% to $5.5 billion. But its retail financial services division lost $131 million after generating a $474 million profit a year earlier. The provision for credit losses declined just 4% to $3.7 billion, signaling ongoing difficulty in consumer-related businesses.

Bank of America's global banking and markets divisions boosted net profit 28% to $3.2 billion, accounting for more operating income than all of its other divisions combined. Its commercial banking business swung to a net profit of $713 million from a loss of $30 million a year earlier, but the loss on home loans and insurance widened to $2.1 billion from $494 million. Management is celebrating its ability to cut the amount it needs to set aside for future loan losses.

Industrial conglomerate General Electric offers an enlightening perspective. GE missed analysts' mean sales forecast by 2% but exceeded the average adjusted EPS figure by 32%. Still, profit decreased 18% to $2.3 billion, or 21 cents a share. GE Capital is still experiencing weakness. Segment profit fell 41% to $607 million, hurt by a wider loss in real estate. NBC Universal boosted its revenue 23%, helping to offset declines in the company's energy and technology infrastructure segments. Profit from energy infrastructure increased 12%.

Aluminum producer Alcoa, whose earnings report has been dubbed a unanimous negative, told a similar tale. Alcoa missed analysts' sales forecast by 6.6%, but its adjusted earnings per share exceeded expectations by 8.7%. Restructuring charges hindered performance and investors reacted harshly to the results.

-- Reported by Jake Lynch in Boston.