Techs, Energy to Prop Up Profits

Alcoa (AA), which serves as the traditional kickoff to earnings season, fumbled its results on Monday, falling short of analysts' expectations. A couple of high-profile warnings also jarred investors: Phelps Dodge (PD) slashed its forecast on Tuesday amid lackluster sales and hedges against copper prices, while DuPont (DD) lowered the bar on Wednesday, citing hurricane-related disruptions and weaker sales. Then there's biotech dazzler Genentech (DNA), which met analysts' expectations on Tuesday, but did little to assuage investors' fears about its ability to maintain its torrid growth.

Of course, for every Alcoa, Phelps Dodge and DuPont, there's an Apple Computer (AAPL). The company responsible for iPods, iMacs, iTunes, iTrucks, iSocks, iGroceryStores — you get the idea — preannounced better-than-expected sales Tuesday for its fiscal first quarter, which ended in December. Considering sales came in 13% higher than consensus estimates at $5.7 billion, the news was an iSurprise.

But the first week of earnings season is always light; next week is when the real avalanche of reports hits, with technology and financial companies dominating. Tech heavyweights IBM (IBM), Intel (INTC) and Motorola (MOT) are expected to release results, as are Internet giants Yahoo (YHOO) and eBay (EBAY). We'll also hear from J.P. Morgan Chase (JPM), Merrill Lynch (MER), Citigroup (C) and Washington Mutual (WM).

Will the impact of hurricanes be discussed? Most likely. High energy prices? Count on it. Stock-options expensing? Most assuredly. When all is said and done, however, the fourth quarter shouldn't turn out half bad. Analysts forecast the Standard & Poor's 500 to post earnings growth of 13.4%, according to Thomson Financial.

Sure, that wouldn't make it as strong as the third quarter's 16.0% or the year-ago's heady 19.7%, and expectations have trended down from the 16.6% earnings growth predicted at the beginning of the quarter (estimates are typically trimmed as the quarter progresses). But if S&P 500 companies collectively manage to put up at least 10% earnings growth, it will be the 10th consecutive quarter of double-digit increases. And that's a pretty impressive profit milestone, considering it's only occurred two other times — from the second quarter of 1972 to the third quarter of 1974, and from the fourth quarter of 1992 to the fourth quarter of 1995 — according to Thomson Financial.

With oil prices ticking higher seemingly every day, it's little surprise that analysts are counting on the energy sector to fare the best. Earnings for this group are forecast to grow 45%, with ConocoPhillips (COP) outpacing the industry with an impressive 48% spike, based on Thomson Financial's estimates. Little wonder then that the sector is the largest contributor to the S&P 500's earnings. If you back energy out, the index's fourth-quarter earnings would only improve 9.1%, according to Thomson Financial.

The next-best performing sector is projected to be technology, with an estimated 17% increase in profits. Two chip makers — Intel and Texas Instruments (TXN) — dominate the top-three contributors to the sector, and if analysts are right neither will be accused of being a fourth-quarter wallflower. Intel is expected to post a 30% rise in profits, while TI should grow earnings a whopping 50%.

Another interesting tech trend is the ratio of negative preannouncements to positive ones. Thomson Financial tracks this to get a sense of the overall earnings tone for various sectors, as well as the broad market. When it comes to tech, the ratio is unusually bullish. As of Jan. 6 (which means Apple's doozey isn't even included in this tally), there were 123 positive preannouncements to 155 negative ones, resulting in a negative/positive ratio of 1.3. That's the lowest it's been at this point in the earnings season since the first quarter of 2004.

Aside from the consumer-discretionary, consumer-staples and health-care sectors, which are expected to post respective earnings growth rates of 3%, 4% and 3%, six of the remaining 10 S&P sectors are forecast to record double-digit earnings growth. That leaves one sector, materials, as the sole decliner. Analysts see profits in this group contracting to the tune of 3%. While the materials sector had one of the highest earnings growth rates from the fourth quarter of 2003 through the second quarter of 2005, these companies have lost steam.

Of course, keeping tabs on which company meets or misses quarterly estimates is riveting stuff and all, but it's the guidance that's key. After all, the fourth quarter is on the books. What are chief executives going to do for investors this quarter?

Let the managing of expectations begin.