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Weekly Wall Street: 4th-quarter earnings likely the worst since 2001

NEW YORK -- It doesn't take highly paid Wall Street analysts to figure out why corporate earnings are trending toward their worst performance in six years.

With roughly half the companies in the Standard & Poor's 500 having reported fourth-quarter results, banks and brokerages have proved to be the biggest drag on the overall earnings picture.

Profit declined 22 percent from the year-ago period for all the S&P com- ponents. Stripping out banks and brokerages, earnings for the index's component companies would be up almost 12 percent.

"There are really two different markets out there," said Howard Silver- blatt, senior index analyst at S&P. "It won't be hard for some fund managers to beat the index so long as they stayed out of the financials."

He said the fourth quarter looks to be the worst since the dot-com implosion in 2001, when a plunge in profit from technology companies caused S&P 500 earnings to tumble 24 percent year over year. This time around, the collapse of the subprime mortgage market is to blame.

Global banks and brokerages have written down almost $150 billion because of steep losses from investments tied to the subprime mortgages that went sour last year as interest rates rose and the housing market slumped. Many financial institutions have been forced to secure more capital to shore up their finances, and analysts believe more charges for bad investments are ahead.

These losses have caused financial companies' fourth-quarter earnings to come in well below Wall Street expectations. Banks and brokerages made up about two-thirds of the companies that missed analyst projections during the quarter.

About 60 percent of S&P 500 companies have beat Wall Street expectations, and 14 percent have met them, according to Thomson Financial. However, 27 percent missed targets, up significantly from the typical 20 percent seen in previous years.

Don't expect the problems in the financial sector to abate anytime soon, especially amid concerns about more write-offs at banks. This means the S&P 500 has, at least temporarily, lost its biggest profit driver.

Losses from financial players Citigroup Inc., Bear Stearns Cos. and Merrill Lynch & Co. wiped about $61 billion from the S&P 500's overall profit during the fourth quarter. That is roughly one-third of the proposed economic stimulus package being debated in Washington.

The numbers are jarring: S&P 500 companies are expected to have made $150 billion during the fourth quarter compared to nearly $200 billion a year earlier. The index's 93 financial companies -- which last year accounted for 27 percent of the S&P 500's overall profit -- are forecast to have logged an estimated $7 billion loss during the recently completed quarter.

"We look at the S&P as a whole, and certainly what happens every quarter is there is a group that lags. But the financial sector is the biggest," said Ed Peters, chief investment officer at PanAgora Asset Management. "Everybody looks at year-over-year levels, and given current credit conditions are going to tighten, it means we're not going to get great results in the financial sector for the time being.

In the meantime, the bad news in the financial sector doesn't seem to be relenting. Swiss bank UBS AG this past week said it anticipates bigger-than-expected write-downs related to subprime mortgages.

Investors have also had to contend with what might be a new front in the credit crisis: bond insurers. MBIA Corp., the biggest U.S. bond insurer, swung to a fourth-quarter loss amid worries that the industry faces a barrage of credit rating actions.

S&P's Silverblatt said any indication that financial institutions have gained control over the fallout from the subprime situation might become an instant buying opportunity.

"If we don't get the mega-charges, the earnings are going to have a very good increase," Silverblatt said.

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