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S&P Wraps Up Worst Quarter For Earnings, Sales In 3 Years

Consumers added a bit of holiday cheer to an otherwise dismal third quarter.

As of Friday, 97% of S&P 500 companies had reported Q3 earnings, showing a 0.1% gain overall, according to Thomson Reuters data. That was better than the 2.1% drop analysts forecast on Oct. 1, when the quarter was over for most companies.

The boost was aided by retailers, whose reports lag most firms'.

Consumer discretionary stocks, including chains such as Target (TGT) and Home Depot (HD), delivered the biggest jolt, with profits up 12.3%. Consumer staples, including Wal-Mart Stores (WMT) and upscale grocer Whole Foods (WFM), showed 2.6% average growth.

But overall S&P profit and revenue growth was the weakest since Q3 2009, just after the recession. Revenue shrank 0.8%, meaning firms had to wring out more cost cuts to deliver even those meager profits.

Almost two-thirds of firms beat analysts' modest earnings forecasts, up slightly from the 62% long-term average, according to Thomson Reuters. But only 40% of them beat on revenue.

For the fourth quarter, analysts see corporate earnings climbing 4.2%. That's down from their rosier forecasts of 13.9% on July 1.

But with sales hard to come by, analysts haven't trimmed profit forecasts enough, says Jason DeSena Trennert, managing partner at Strategas Research Partners.

"Revenue growth is the only thing that can give you the type of earnings that the Street seems to be counting on," he said.

Stores are expected to bring in 4% more sales this holiday season, Moody's Investors Service says, vs. last year's 6.5% jump.

Retailers took a hit from Hurricane Sandy, which slammed into the New Jersey coast in late October. That set retail sales back slightly that month.

But some retailers, including Home Depot and rival Lowe's (LOW), benefited as consumers in the Northeast stocked up on disaster supplies. The cleanup and rebuilding efforts should boost sales in coming quarters.

A slow recovery in housing also helped Home Depot, as well as homebuilders such as D.R. Horton (DHI) and PulteGroup (PHM).

Adding uncertainty is the looming fiscal cliff of tax hikes and federal spending cuts that could hit next year. Moody's thinks it could dampen Q1 consumer spending.

"There's such a long shadow of government, of Washington over the normal economic cycle," DeSena Trennert said.