Profit growth hits headwind

Investors wonder if days of double- digit gains have ended

Stocks are enjoying one of their best stretches in years. Too bad you can’t say the same about corporate earnings.

With more than half the companies in the Standard & Poor’s 500 reporting their fourthquarter results, it’s been a solid quarter, with 7.5% growth, but not up to the stellar levels of the previous recent quarters.

And that’s leaving some investors wondering if earnings that are just good enough can help stocks maintain their strong upward trajectory.

“It’s been the weakest quarter that we’ve had since the depths of the recession,” says Dirk Van Dijk of Zacks Investment Research. “We’ve had a fantastic rate of earnings growth ( in previous quarters). But there’s a limit to what you can do. Wemay be approaching that limit.”

Now that 296 companies in the S& P 500 have reported results for the fourth quarter of 2011, investors are taking a closer look at the numbers and noticing:

- Slowing growth. Investors have seen earnings growth slow down in each of the past eight quarters, S& P Capital IQ says. Corporate earnings grew 17.3% in the third quarter and 28% in the fourth quarter of 2010, well above the 7.5% growth rate of the fourth quarter of 2011.

The slowing growth shows how companies’ expansion is moderating as the darkest days of the recession are left behind, says S&P Capital IQ’S Howard Silverblatt. “We’re done boomeranging off the lows,” he says.

- Fewer companies beating estimates. While investors have been spoiled with 73% of companies topping estimates over the past four quarters, on average, in the fourth quarter of 2011, just 65% of companies did, says John Butters of Factset.

“It’s a good number, but lower,” Butters says.

The lower level of better- than- expected results comes even though analysts slashed expectations coming into the fourth quarter.

On Sept. 30, analysts expected fourth- quarter growth to be 12.7%. Now they expect 5.8% growth, Butters says.

- Moderating revenue growth. Investors have been pleased companies have found new sources of revenue and boosted the dollars hauled in by 8.6% for the quarter so far, Silverblatt says. But that’s still down from 11% revenue growth in the third quarter.

Despite the signs of slowdown, investors still think there’s growth to be tapped even though earnings have grown every quarter since the first quarter of 2010.

Some companies, including Alcoa, Rockwell Automation and Cooper Industries, for instance said they expect demand in emerging nations, which had been a driver of growth, to pick up in the second half, Butters says.

So while the fourth quarter may not have set a record for profits, as the third quarter did, it’s still going to be the third- or fourth- best quarter on record, Silverblatt says. “So maybe we didn’t win the mega lottery, but we won the daily,” he says.