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DealBook: Citigroup Earnings Disappoint

Strategies: Rosy Earnings Forecasts, at Least at First

IS the glass half full or half empty? For several thousand analysts who make a living assessing the value of publicly traded stocks, the answer depends on which week it happens to be.

That’s what a study of the Standard & Poor’s 500 earnings cycle by Thomson Reuters/I/B/E/S shows.

The distant future sometimes looks better than the mundane day-to-day of the moment. For stock analysts who crunch numbers to come up with earnings estimates for individual companies, the far horizon is often just one year down the road. And the numbers show that when analysts estimate quarterly earnings a year in advance, they tend to be unrealistically optimistic about the prospects of companies they cover, according to Greg Harrison, the senior research analyst at Thomson Reuters who did the study.

Mr. Harrison’s day job involves compiling consensus earnings estimates for the overall stock market, figures he derives from the collective appraisals published by thousands of individual analysts. Does the market expect earnings for the S.& P. 500-stock index to rise or fall, and by how much? Have companies met expectations for the quarter, or will they disappoint the market? Some of the answers come from the data he gathers each week.

But while doing his work, he noticed a consistent pattern in the numbers, which he describes in a fascinating study of earnings since 2008, titled “Estimates Too High, Low? Check the Calendar.”

Except for several quarters in the Great Recession, he found, early earnings estimates are generally rosy, and become predictably and progressively gloomier as time goes on. As analysts revise estimates downward, it becomes easier for companies to beat the market consensus, creating what Wall Street calls a “positive earnings surprise” roughly two-thirds of the time.

Positive surprises, of course, are good for share prices. Negative surprises are not. And by being optimistic about the long-term future, and relatively pessimistic about immediate results, the quarterly cycle of stock market earnings estimates has the effect of bolstering the market.

Analysts, of course, are encouraged in this practice by corporate executives who routinely issue warnings — “guidance,” in Wall Street parlance — that their companies won’t really meet the analysts’ lofty targets. The analysts respond by lowering their targets.

Typically, Mr. Harrison finds, analysts are most accurate — neither too optimistic nor too pessimistic — about seven weeks before companies actually release earnings.

“That’s when analysts’ estimates and the eventual, real numbers meet,” Mr. Harrison said. But the analysts don’t leave well enough alone. Instead, they keep cutting their forecasts and end up being gloomier than reality warrants. “By the time earnings season actually ends,” he says, “it turns out that the analysts have been too pessimistic — and we end up with a lot of ‘earnings surprises.’ ”

We’re now near the end of the earnings season for the second quarter. Most big companies have already issued their final numbers for the period, and the current pattern fits the overall picture fairly well, Mr. Harrison says.

On July 2, 2012, for example, when he compiled the first market consensus for the second quarter of this year, analysts as a group were projecting great things for stocks one year ahead. They said earnings would grow at the blistering pace of 14.4 percent in the second quarter of 2013.

Reality hasn’t come close to matching that early optimism — but because analysts repeatedly ratcheted their projections downward, earnings reports have been surpassing the relatively pessimistic estimates of recent weeks.

On Friday, with 462 members of the S.& P. 500 reporting, Mr. Harrison found that the actual growth rate so far has been only 4.9 percent. Yet 67 percent of those companies beat the analysts’ estimates, producing positive surprises. How was that possible? Analysts collectively dropped their estimates for the quarter to only 2.9 percent on July 1, when earnings season began. The actual results were much better than that.

The rough pattern held for many major companies. Consider General Motors. On July 2, 2012, analysts covering G.M. estimated that it would have earnings per share of $1.25 in the second quarter of 2013. That July, the estimate of Ryan Brinkman, an analyst at J.P. Morgan, was $1.12. G.M. has “best-in-class leverage to global growth markets, ongoing operational turnaround, and improving product cadence,” he wrote.

G.M. has had problems, however. The company acknowledged that it was doing poorly in Europe. By mid-April, after a report that industrywide sales there had plummeted to a 30-year low, and that G.M.’s Opel brand was lagging, analysts’ estimates fell to 73 cents a share. Mr. Brinkman’s was 72 cents. For all analysts, they stood at 74 cents at the beginning of July and edged up to 75 cents the week of July 12.

But that was still way off the mark. G.M.’s actual earnings, released on July 25, were 84 cents a share. Although earnings declined compared with a year earlier, news coverage generally treated the announcement as a positive surprise.

Mark Bradshaw, an accounting professor at Boston College, says what we are seeing is probably overconfidence by analysts and deft maneuvering by corporate executives, who have leeway in adjusting accounting to improve reported profits and in choosing what information to reveal. “For companies, issuing ‘guidance’ has become an art form,” he said. “The analysts seem to try to do what they can, but they’re often at a loss.”

Aswath Damodaran, a finance professor at New York University, called the earnings season “a Kabuki dance” in which “analysts are trying to forecast; companies are trying on the other side, with accounting choices, to affect those earnings and to lower the forecasts; the companies watch the analysts; the analysts watch the earnings; and it’s all a big game. And it’s a game that the companies generally win.”

Frequent traders scrutinize these rituals, he said, seeking nuance. For them, he said, “it’s not enough now just to beat the earnings forecast. That’s too common. Now, you’ve got to beat the forecast enough — by a big-enough number that it really is a surprise — if you want to stir up the market.”

In his view, most of us would be better off ignoring short-term earnings reports. “None of this matters much to long-term investors,” he said. “It’s the long-term picture that’s important, and that is revealed eventually, even if it isn’t clear now.”

Is the glass half full or half empty? Don’t even try to figure that out during earnings season.

DealBook: BlackRock Earnings Increase 32%

Richard Drew/Associated PressLaurence Fink, chief of the asset manager BlackRock.

5:51 p.m. | Updated

The giant money manager BlackRock rose to fame as a bond manager, but it appears to have skated around the recent turmoil in the bond market.

BlackRock said on Thursday that it booked record profits and revenues in the second quarter at a time when rising interest rates caused big losses for many bond investors.

BlackRock’s bond, or fixed-income, products attracted new money as customers moved into investments intended to shield them from a rise in long-term interest rates.

Interest rates began rising after Federal Reserve officials hinted in May that they might begin the process of allowing interest rates to rise after years of keeping rates low to support economic growth.

While many asset managers saw investors fleeing bond funds, BlackRock’s results suggest that the response has been nuanced and has varied around the globe.

“We expect to see flows moving into more flexible, nontraditional fixed-income products,” the firm’s chief executive, Laurence D. Fink, said in a call with investors. “Across the board we are well positioned to benefit from the changes in fixed income.”

BlackRock said net income in the second quarter rose 32 percent, to $729 million, or $4.19 a share, compared with $554 million, or $3.08 a share, in the period a year earlier. Net income was about 15 percent higher than in the previous quarter. The results handily beat the average estimate of $3.81 a share among analysts polled by Bloomberg News.

The company’s shares closed up 2.4 percent on Thursday.

BlackRock’s gains from a year earlier were largely driven by the broad rally in the stock market, which pushed up the value of BlackRock’s products, especially its exchange traded funds known as iShares.

Over the last three months, markets have been more mixed, but BlackRock’s funds have still attracted new money. Over all, BlackRock products had $11.9 billion of net inflows. Most of that went to funds that can hold multiple asset types and active bond funds that charge higher fees.

Many analysts had expected that BlackRock would have overall outflows from its funds.

“To have delivered net positive flows is a pretty good outcome,” said James Shanahan, an analyst at Edward Jones. Mr. Shanahan added that he was somewhat concerned by some rising expenses at BlackRock and the bumpy nature of the company’s ability to attract new assets.

The company’s results were somewhat of a departure from recent quarters, when the biggest inflows went into the iShares exchange-traded funds. During the second quarter, iShares experienced overall outflows of $963 million.

Fair Game: In Bank Earnings, Quantity Over Quality

The new high followed a report last week from the Federal Deposit Insurance Corporation, showing record earnings across a wide swath of the banking sector in the first quarter. The F.D.I.C. did not break out individual bank performance, but the data showed that the roughly 7,000 banks whose deposits were federally insured earned $40.3 billion, up from $34.8 billion in the same period last year. That’s a nifty 15.8 percent increase.

There was other good news about the banks in the F.D.I.C.’s report. Returns on assets increased to 1.12 percent, on average, from 1 percent for the same period in 2012. And the number of banks on the regulator’s problem list fell to 612 from 651 at the end of last year. Only four insured institutions failed in the first three months of 2013 — the fewest since mid-2008.

These are all welcome developments, especially after the near-death experience of so many banks and their shareholders during the financial crisis. Clearly, the United States banking industry as a whole is better off than it has been for years.

But, as is often the case, a more nuanced tale emerges when you look more closely at the profit figures. Put simply, there is less to the headline number than some investors may think.

For one thing, the good news wasn’t across the board: only half of the insured institutions reported higher quarterly profits, year-over-year. That was the lowest percentage since the last quarter of 2009.

But the quality of the banks’ earnings — an important consideration for investors — starts to look less pretty when you start examining the data. Once you do that, you can identify one-time gains or other gimmicks that can create ephemeral increases or otherwise make the results appear better than they actually are.

Several red flags pop up in the F.D.I.C. report. The most important appears in its discussion of banks’ net interest income, the measure of what a bank earns on its lending after deducting what it pays out on deposits and other liabilities.

This is a crucial gauge of bank profitability — after all, banks are in the business of lending money — and it is on a downward slide. It declined $2.4 billion, or 2.2 percent, among the banks the F.D.I.C. examined during the first quarter, with the average net interest margin falling to 3.27 percent from 3.51 percent in the same period last year. The most recent figure is the lowest since 2006, the F.D.I.C. said.

This crimp comes courtesy of the zero-interest-rate policy of the Federal Reserve Board. As borrowers pay off older loans made at higher rates, banks can replace them only with lower-yielding loans. Sure, their costs are lower, but the spread between what they earn and what they pay out has become razor thin.

Loan balances at these banks also fell slightly during the quarter. Total loans and leases shrank by almost $37 billion, or 0.5 percent, a decline fueled by lower credit card balances, home equity lines of credit and residential mortgage loans. Many bankers may be hesitating to make loans, worrying that interest rates will soon rise; when they do, loans made at current low rates will fall in value.

So how did the banks manage to bolster their overall profits so substantially? They searched for income elsewhere, and found it in the annoying and sometimes egregious fees they charge to consumers. Noninterest income at the banks rose by $5.1 billion in the quarter, according to the F.D.I.C., or 8.3 percent.

Cost-cutting at a few large institutions also contributed to the overall brighter picture in earnings. This was evident in the $4.2 billion decline in noninterest expenses in the quarter, a drop of almost 4 percent.

Another red flag is seen in reductions in set-asides for loan losses. Banks have a good deal of leeway in deciding how much money to provide for future losses. If banks play down the risks in their portfolios and reduce the amount to cover potential losses, that additional money makes their earnings look better.

The loan-loss provisions fell to $11 billion in the quarter, a decline of $3.3 billion, or 23 percent, from the same period a year ago. As the F.D.I.C. noted, this provision is the lowest among the banks since early 2007, at the height of the housing bubble. Reduced allowances for losses were reported by 53 percent of the institutions covered by the report.

So is everything rosy in these institution’s loan portfolios? Are their risks much lower? Not exactly. Loans that are delinquent more than 90 days accounted for 3.41 percent of total loans in the first quarter, the F.D.I.C. said. Although this is down from more than 5 percent, a few years ago, it is still high. In 2007, for example, it was 0.83 percent.

Put it all together, and you see the clouds moving in on the sunny earnings report. Banks’ considerable profits seem fueled by cost-cutting and lowered loan-loss provisions. The effects of such tonics only last so long.

Scott A. Anderson, chief economist at Bank of the West, said the F.D.I.C. report showed that scars from the financial crisis remained in the banking system. With banks still reluctant to lend, he said, the nation’s economic recovery was being held back.

If banks don’t make loans, Mr. Anderson noted, our economy can’t expand as it normally does in a recovery. Even six years after credit started to seize up around the world, we are still relying on the Fed to keep the economy moving.

SUCH is the box the Fed finds itself in. Its muscular response to the credit crisis staved off economic disaster. But its continued efforts to keep interest rates low are doing nothing to encourage lending by banks.

“How does the Fed unwind what it’s done over the past five years without disrupting the bond market and interrupting the flow of loans in the banking system?” Mr. Anderson asked in an interview. “How do you do that without reversing some of the positives?”

Taking away the punch bowl at the party has never been easy for Fed chairmen. This time, though, it’s going to be downright treacherous.

H.P. Earnings Are Higher Than Expected

H.P. reported that net income fell 31 percent to $1 billion, or 55 cents a share, from the year-ago quarter. Revenue fell 10 percent, to $27.6 billion, H.P. said.

“We beat the upper end” of company projections for the quarter, Meg Whitman, H.P.'s chief executive, said in a statement accompanying the earnings. “I feel good about the rest of the year.”

The net income was above the expectations of Wall Street analysts, who mark their revenue and earnings projections based on nonstandard accounting. By those measures, H.P. had net income of 87 cents a share.

Analysts had projected H.P. would make 81 cents a share, on revenue of $28.12 billion, according to a survey of analysts by Thomson Reuters.

H.P., the world’s largest maker of personal computers and printers, has struggled for years with a declining market for PCs, less printer demand and turmoil in its executive ranks.

Ms. Whitman, who took over in September 2011, has said that fixing the company will be a five-year process and has described 2013 as a year of rebuilding before growth accelerates in 2014.

Mobile Ads Help Propel Earnings At Facebook

Those concerns were silenced a bit on Wednesday, when Facebook’s earnings report offered early signs that the company was cracking the mobile revenue code.

In the first three months of the year, the company’s mobile advertising generated $375 million in revenue, exceeding what analysts had expected. Mobile revenue accounted for 30 percent of the company’s advertising revenue in the first quarter of this year, compared with 23 percent in the same period last year.

“What we have seen has made us more confident we can do more with advertising over time,” the company’s chief executive and co-founder, Mark Zuckerberg, told analysts on an earnings call on Wednesday. He said one of his top goals was to build “the best mobile product” — and make money from it.

Despite the strong mobile numbers, investors did not extol the company on Wednesday, largely because it continues to spend a lot of money to develop new features. The company’s shares fell about 1 percent, closing at $27.43, before the earnings were reported. Facebook shares swung up and down in after-hours trading but ended at $27.51.

Just last year, Mr. Zuckerberg said that Facebook was late in retooling itself for the mobile era. At Facebook headquarters, morale-raising posters went up on the walls screaming “Our Mobile Future.”

Since then, Facebook has introduced more than a half-dozen advertising products. They include what are called app-install ads, which are meant to help app developers draw new customers and more refined advertising tailored to consumers’ online and offline behavior.

Facebook has recently partnered with third-party data companies that track who buys soda at the supermarket and who is planning to buy a car in the next six months.

Facebook executives said the company planned to hone its targeting even more.

Two-thirds of Facebook’s 1.1 billion users across the world log into the site on their phones, the company said Wednesday, accounting for what executives described as strong growth in populous countries like India and Brazil.

For those mobile users, the changes mean more ads when they log in on their cellphones and eventually more finely targeted ads. And they mean a redesigned News Feed, a feature introduced in March, that offers marketers a chance to show off pictures and bigger and more prominent links.

“We want content in ads that’s as good as content from a friend or somewhere else on the site, as well as to have a higher return for marketers,” said Sheryl Sandberg, the company’s chief operating officer. “Those go hand in hand. What you’ll see from us is better targeting.”

All told, revenue increased 38 percent, to $1.46 billion, exceeding the $1.44 billion estimate of financial analysts surveyed by Bloomberg News. The company had $219 million in net income. It reported a profit of 12 cents a share, missing the average estimate by a penny.

“Over all, they’re on track,” said Aaron Kessler, an analyst with Raymond James. “They’re still rolling out new products for advertisers. They’re definitely more focused on creating shareholder value and driving revenue growth.”

In early April, the company introduced mobile software for Android phones called Facebook Home that is intended to nudge Facebook users to return to their mobile News Feeds even more frequently than they do now.

The new suite of applications effectively turns the News Feed into the screen saver of a smartphone, updating it constantly with Facebook posts and messages. It appears to be only a matter of time until the company introduces ads there.

Last May, Facebook held a widely publicized initial public offering of stock, at a price of $38 a share. Its fairy tale rise took a sharp dive almost immediately, resulting in lawsuits and angry recriminations. Its shares slumped to half the opening price at one point last fall, and they have inched up cautiously since then.

On Wednesday, Facebook filed a motion asking a federal judge to dismiss a lawsuit that accused the company of misleading investors about its financial strategy before the public offering, Reuters reported. The company said in court papers that it was not legally obligated to disclose publicly how mobile adoption would affect its financial performance in the future.

Wall Street analysts have watched closely for signs of Facebook fatigue among users. In the first quarter, they point out, fewer monthly users returned to Facebook on their desktop computers in the United States and Europe, according to comScore figures.

Analysts worried whether that meant that users in more mature and lucrative markets were getting bored with Facebook. But they noted that the figures applied only to desktop users and revealed little about mobile users of Facebook.

Joint Venture With China Lifts Pfizer’s Earnings

Pfizer, which is based in New York, reported first-quarter net income of $2.75 billion, or 38 cents a share, up from $1.79 billion, or 28 cents a share, a year earlier. Excluding one-time items, adjusted income was 54 cents a share, a penny less than the forecast of analysts surveyed by FactSet.

Results were helped by a $490 million gain from the transfer of some product rights to its joint venture in China. In the year-ago quarter, Pfizer took charges totaling $1.66 billion for litigation, acquisition and other costs.

Revenue in the latest quarter was $13.5 billion, down 9 percent from $14.89 billion a year earlier and below analysts’ expectations. Sales rose 5 percent to $2.42 billion in emerging markets like China, a crucial growth market for the industry as American and European health programs try to hold down costs.

Pfizer also lowered its earnings forecast by 6 cents to $2.14 to $2.24 a share and its revenue forecast by $900 million to $55.3 billion to $57.3

The current quarter showed the company continued to struggle after losing patent protection in the United States on some of its blockbuster drugs. The biggest hit has come from generic versions of Pfizer’s cholesterol fighter Lipitor, which was the world’s best-selling drug for nearly a decade until it lost exclusivity in 2011 in the United States and in much of Europe last year. Sales of Lipitor, which once brought in about $13 billion a year, dropped 55 percent to $626 million in the first quarter.

The company also has been selling off nonpharmaceutical assets and using the proceeds to repurchase more shares. Indeed, Pfizer noted on Tuesday that it has returned about $8 billion to shareholders so far this year in dividends and share repurchases.

“They’re having trouble hitting their sales goals, so they need to make up for it with financial moves, like buying back shares, that help prop up the stock price,” Erik Gordon, a professor at the Ross School of Business at the University of Michigan, wrote in an e-mail.

Even so, sales also fell for some big sellers still protected by patents, including the erectile-dysfunction drug Viagra, which was down 7 percent at $461 million.

The bright spots during the quarter were Lyrica, for fibromyalgia and other pain, up 12 percent at $1.07 billion, and the anti-inflammatory pain reliever Celebrex, up 3 percent to $653 million.

Wall Street Ends Mostly Flat on Mixed Earnings

The stock market finished pretty much where it started on Wednesday as a mixed collection of earnings from big-name American companies left investors uninspired.

The Standard & Poor’s 500-stock index, the market’s most widely used indicator, ended just barely higher, by 0.01 point.

The Dow Jones industrial average slid 43.16 points, held back by big drops in Procter & Gamble and AT&T. P.& G. issued a weak quarterly profit forecast, and AT&T lost subscribers from its contract-based plans for the first time.

Investors are taking their cue from a heavy dose of earnings this week.

Procter & Gamble, the maker of Tide detergent and Gillette razors, dropped $4.82, or 5.9 percent, to $77.12 after its profit forecast came in below analysts’ expectations.

AT&T dropped $1.96, or 5 percent, to $37.04 after it lost phone subscribers from its contract-based plans in its latest quarter, in a sign that industry growth was slowing now that most Americans have smartphones.

But the mood on Wall Street was tempered by Boeing and General Dynamics, which reported strong quarterly profits.

Boeing, a Dow component, climbed $2.65, or 3 percent, to $90.83 after the airplane maker said its first-quarter net income rose 20 percent despite problems with the 787 Dreamliner. The company said it would still meet its financial and delivery targets this year.

General Dynamics, the aerospace and military contractor, surged $4.63, or 6.9 percent, to $71.73 after posting a profit that was better than expected.

So far, 175 of the companies in the S.& P. 500, or 35 percent, have reported quarterly earnings. Two-thirds of the Dow’s members have reported. While the majority have delivered better-than-expected profits, their sales have not been as strong, suggesting they were struggling to grow.

Sixty-nine percent of companies in the S.& P. 500 have beaten earnings expectations, better than the 10-year average of 62 percent, according to S&P Capital IQ. But only 39 percent have beaten revenue forecasts.

Looking ahead, the outlook dims. Of the 35 companies that have given earnings forecasts for the second quarter, 28 are negative, according to S&P Capital IQ, with only four positive and three in-line.

“We think that most managements are appropriately cautious in their outlooks, because it’s very possible that the second quarter will continue to slow,” said Jim Russell, a regional investment director at U.S. Bank.

The Dow closed down 0.3 percent, at 14,676.30. The S.& P. 500 index was up 0.01 point, to 1,578.79.

The Nasdaq composite edged up 0.32 point to 3,269.65.

The market’s gains in April have slowed sharply after a first-quarter surge pushed both the Dow and the S.& P. 500 to nominal highs.

The Dow is up just 0.7 percent this month while the S.& P. 500 has gained 0.6 percent.

During the first three months of the year, the Dow and the S.& P. 500 averaged monthly gains of more than 3 percent, driven by optimism that the housing and job markets were recovering and that company earnings would continue to climb.

Companies are still making money in the first quarter, however, and are on track to increase their earnings by an average of almost 3 percent, according to S&P Capital IQ.

“Over all, I’m really quite comforted,” said David Kelly, chief global strategist at JPMorgan Funds. “It’s not an easy environment in which to make money, but companies are finding ways in which to hold costs in line and grow earnings.”

In the bond market, the price of the Treasury’s 10-year note rose
1/32, to 102 22/32, while its yield slipped to 1.70 percent, from 1.71 percent late Tuesday.

This article has been revised to reflect the following correction:

Correction: April 24, 2013

Because of an editing error, an earlier version of this article misstated the day's trend in the Nasdaq composite index. It closed up, not down, by 0.01 percent.

Wall Street Ends Mostly Flat on Mixed Earnings

The stock market finished pretty much where it started on Wednesday as a mixed collection of earnings from big-name American companies left investors uninspired.

The Standard & Poor’s 500-stock index, the market’s most widely used indicator, ended just barely higher, by 0.01 point.

The Dow Jones industrial average slid 43.16 points, held back by big drops in Procter & Gamble and AT&T. P.& G. issued a weak quarterly profit forecast, and AT&T lost subscribers from its contract-based plans for the first time.

Investors are taking their cue from a heavy dose of earnings this week.

Procter & Gamble, the maker of Tide detergent and Gillette razors, dropped $4.82, or 5.9 percent, to $77.12 after its profit forecast came in below analysts’ expectations.

AT&T dropped $1.96, or 5 percent, to $37.04 after it lost phone subscribers from its contract-based plans in its latest quarter, in a sign that industry growth was slowing now that most Americans have smartphones.

But the mood on Wall Street was tempered by Boeing and General Dynamics, which reported strong quarterly profits.

Boeing, a Dow component, climbed $2.65, or 3 percent, to $90.83 after the airplane maker said its first-quarter net income rose 20 percent despite problems with the 787 Dreamliner. The company said it would still meet its financial and delivery targets this year.

General Dynamics, the aerospace and military contractor, surged $4.63, or 6.9 percent, to $71.73 after posting a profit that was better than expected.

So far, 175 of the companies in the S.& P. 500, or 35 percent, have reported quarterly earnings. Two-thirds of the Dow’s members have reported. While the majority have delivered better-than-expected profits, their sales have not been as strong, suggesting they were struggling to grow.

Sixty-nine percent of companies in the S.& P. 500 have beaten earnings expectations, better than the 10-year average of 62 percent, according to S&P Capital IQ. But only 39 percent have beaten revenue forecasts.

Looking ahead, the outlook dims. Of the 35 companies that have given earnings forecasts for the second quarter, 28 are negative, according to S&P Capital IQ, with only four positive and three in-line.

“We think that most managements are appropriately cautious in their outlooks, because it’s very possible that the second quarter will continue to slow,” said Jim Russell, a regional investment director at U.S. Bank.

The Dow closed down 0.3 percent, at 14,676.30. The S.& P. 500 index was up 0.01 point, to 1,578.79.

The Nasdaq composite edged up 0.32 point to 3,269.65.

The market’s gains in April have slowed sharply after a first-quarter surge pushed both the Dow and the S.& P. 500 to nominal highs.

The Dow is up just 0.7 percent this month while the S.& P. 500 has gained 0.6 percent.

During the first three months of the year, the Dow and the S.& P. 500 averaged monthly gains of more than 3 percent, driven by optimism that the housing and job markets were recovering and that company earnings would continue to climb.

Companies are still making money in the first quarter, however, and are on track to increase their earnings by an average of almost 3 percent, according to S&P Capital IQ.

“Over all, I’m really quite comforted,” said David Kelly, chief global strategist at JPMorgan Funds. “It’s not an easy environment in which to make money, but companies are finding ways in which to hold costs in line and grow earnings.”

In the bond market, the price of the Treasury’s 10-year note rose
1/32, to 102 22/32, while its yield slipped to 1.70 percent, from 1.71 percent late Tuesday.

This article has been revised to reflect the following correction:

Correction: April 24, 2013

Because of an editing error, an earlier version of this article misstated the day's trend in the Nasdaq composite index. It closed up, not down, by 0.01 percent.

DealBook: Barclays and Credit Suisse Post Strong Earnings in Investment Banks

Darren Staples/ReutersBarclays’ investment bank benefited partly from a bullish stock market performance in America.

LONDON — As European policy makers push financial institutions to cut back on their risky trading activity, some of the region’s largest banks are becoming more reliant on their investment banking operations to bolster performance.

On Wednesday, the British bank Barclays and a Swiss rival, Credit Suisse, both reported strong first-quarter earnings for their investment banks that helped to offset some sluggish growth in other divisions like retail banking and wealth management.

The healthy performance comes despite a push by European politicians to limit firms’ exposure to financial risks and to promote lending to local economies.

New tougher capital requirements have forced European banks to shed billions of dollars of assets since the financial crisis began. A proposed cap on banker bonuses that will become effective at European institutions next year has led to fears of a mass exodus of firms’ top earners to international competitors.

The two banks’ first-quarter earnings reflected the strength of investment banking.

Barclays’ quarterly pretax profit for its investment bank rose 11 percent, to £1.3 billion, or $2 billion, or roughly 74 percent of the company’s combined pretax profit over the period.

Over all, Barclays’ quarterly profit, when adjusted for one-time charges, was £1.8 billion, down 25 percent from the same period last year, which missed analysts’ estimates. The fall was linked to £514 million ($784 million) of costs related to a restructuring that includes 3,800 layoffs and a £235 million ($359 million) charge connected to the value of the bank’s debt.

Barclays’ investment bank benefited from renewed deal activity and a bullish stock market performance in the United States, where it now generates around 50 percent of its revenue. For example, the bank is advising Dish Network on its proposed $25.5 billion takeover of Sprint Nextel. “The reality is that investment banking is becoming more dominant for Barclays,” said Ian Gordon, a banking analyst at Investec in London. “The first quarter was a blowout performance.”

At Credit Suisse, pretax profit in its investment banking division rose 43 percent, to 1.3 billion Swiss francs, or $1.4 billion, partly driven by a strong performance in the bank’s fixed-income sales and trading business. In contrast, earnings from the company’s private banking and wealth management business fell 7 percent, to 881 million francs, over the same period.

Credit Suisse reported a net profit of 1.3 billion francs ($1.4 billion) in the first quarter, compared with a profit of 44 million francs ($47 million) in the same period last year, when the bank booked a loss of 1.6 billion francs ($1.7 billion) on the value of its own outstanding debt.

Analysts said the bank’s strong earnings were a result of a cost-cutting program started by the chief executive, Brady W. Dougan. The company’s investment banking division also benefited from a pickup in global stock markets in the first three months of the year.

“The investment bank was the main driver with impressive cost management,” Kian Abouhossein, a banking analyst at JPMorgan Chase in London, said in a research note to investors.

Shares in Barclays fell 1.3 percent in London on Wednesday, while Credit Suisse’s stock price rose 1.5 percent in Zurich.

Attention will now turn to other large European banks that will report their first-quarter earnings over the next few weeks.

Deutsche Bank, the largest bank in Germany and one with a major investment banking division, will announce its results on Tuesday, as will the Swiss banking giant UBS. Analysts are expecting a fall in UBS’s first-quarter net profit as the company continues to carry out sharp reduction in its investment bank, which includes around 10,000 job cuts, to focus on its wealth management business.

The continued reliance on investment banking at some of Europe’s largest institutions follows efforts by politicians and top banking executives to reshape the Continent’s financial sector.

Some banks, like UBS and Royal Bank of Scotland, are reducing their exposure to risky trading assets, while others, like HSBC and Standard Chartered, are increasing their operations in fast-growing emerging markets.

Antony P. Jenkins, Barclays’ chief executive, also is trying to rehabilitate the company’s image after a series of recent scandals. Last year, the bank agreed to a $450 million settlement with the United States and British authorities after some of its traders were found to have manipulated crucial global benchmark rates for financial gains.

Wall Street Closes Lower as Earnings Reports Begin

Stocks trading on Wall Street ticked lower on Tuesday as an earnings season that is expected to show sluggish corporate growth got under way.

The Standard & Poor’s 500-stock index closed 0.3 percent lower, the Dow Jones industrial average lost 0.4 percent and the Nasdaq composite index fell 0.2 percent.

Over the next couple of weeks, reports on fourth-quarter profits are expected to come in above the previous quarter’s lackluster results, but analysts’ current estimates are down sharply from where they were in October. Quarterly earnings are expected to grow by 2.8 percent, according to Thomson Reuters data.

German data showed industrial orders fell more than forecast in November because of a sharp drop in demand from abroad, reinforcing concerns that Europe’s largest economy may have contracted in the fourth quarter of 2012.

“I’m surprised futures are holding up, given the relative disappointment that German data showed, but I think all eyes are on the beginning of earnings season,” said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.

European shares ended mixed after the German report, with the DAX index in Frankfurt down 0.5 percent and the CAC 40 in Paris up slightly.

Monsanto shares rose 2 percent after the world’s largest seed company raised its earnings outlook for fiscal 2013 and posted strong first-quarter results.

Shares of the restaurant-chain operator Yum Brands fell 4.2 percent. On Monday, the company, which owns KFC, warned that sales in China, its largest market, shrank more than expected in the fourth quarter.

Vodafone shares rose 2 percent in London after its American partner in the joint venture Verizon Wireless said it would be “feasible” to buy out the British group.

Sears Holdings shares were 6.4 percent lower a day after the company said its chief executive would step down for family health reasons.

GameStop shares fell 6.3 percent after it reported sales for the holiday season and cut its guidance.

Media Decoder Blog: Publishing Loss Weighs on Martha Stewart Earnings

Martha Stewart Living Omnimedia announced a big third-quarter loss on Friday morning, driven largely by the poor performance of its publishing unit. The net loss was $50.8 million, or 85 cents a share, compared with $9.7 million, or 36 cents a share, in the same period the year before.

“Our performance in the quarter was in line with our expectations but not our ambitions for the company,” Lisa Gersh, the company’s president and chief executive, said in a statement.

The company’s three-pronged business, which depends on revenue from publishing, broadcasting and merchandising, benefited from a modest rise in revenue from its merchandising operation. But they were not enough to compensate for the losses incurred by its magazines. Revenue in the publishing division fell to $27.6 million, from $33.2 million in the same period last year, and operating losses totaled $51.3 million, including a $44.3 million noncash write-down.

The announcement capped a rough week for the company, which lost its power at its Manhattan offices and had to use phone and e-mail to inform the staff about layoffs and cutbacks at two of its four magazines. On Thursday afternoon, the company said it would lay off about 70 of its 600 employees. It also announced it would cut back publishing the magazine Everyday Food from 10 issues to five and no longer sell it as a standalone magazine. It is becoming a supplement that will be sold with Martha Stewart Living.

The company is also selling Whole Living Magazine. If it does not find a buyer, the company will stop printing Whole Living by the year’s end.

Michael Kupinski, director of research for Noble Financial Capital Markets, said he was more optimistic because he had a clearer perspective of the company since “they’ve gotten rid of so many money-losing assets.”

He added: “The loss came in a little bit better that I was anticipating. To me this is probably one of the best opportunities to take a good look at Martha Stewart.”

G.M. Earnings, Like Its Rivals, Are Hurt by Europe

G.M. reported that its net income for the quarter was $1.48 billion, down from $1.73 billion in the same period last year. The company said global revenue increased to $37.6 billion, up from $36.7 billion in the third quarter of 2011.

Like many other automakers, G.M.’s losses broadened in the troubled European market. The company said its pretax loss in the region was about $500 million compared to about a loss of about $300 million a year ago.

Pretax income from G.M.’s North American operations also declined during the quarter to $1.8 billion, down from $2.2 billion last year.

The automaker’s chief executive, Daniel Akerson, called the quarter “solid” and said the company was gaining traction with new vehicles while addressing financial challenges, like pension costs.

“G.M. had a solid quarter because customers around the world love our new vehicles and we’re also seeing green shoots take hold on tough issues like complexity reduction, pensions and Europe,” Mr. Akerson said in a statement.

G.M. also said that about 30 percent of eligible salaried retirees in the United States had elected to take lump-sum payments in exchange for giving up regular pension benefits. Ongoing pension obligations for the rest of the company’s salaried retirees in the United States will be transferred to Prudential Insurance next month, G.M. said.

The company said it would take a $2.9 billion pretax charge in the fourth quarter in connection with the pension changes.

G.M. gave no new details on how it would turn around its European operations, which are now on track to post a pretax loss of $1.5 billion to $1.8 billion for the full year.

Ford Motor Company, G.M.’s Detroit rival, last week said it would close three plants in Europe and eliminate 5,700 factory jobs in an effort to revitalize its European business.

G.M.’s chief financial officer, Dan Ammann, said in a statement that the company is working to improve its European unit, where plants are operating at well below capacity because of the sharp downturn in vehicle sales in the region. G.M. is also conducting a search for a new chief executive of the European business.

“While we still have a lot of work to do, especially in Europe, it is encouraging to see our results begin to reflect the discipline we are bringing to bear on the overall business,” Mr. Ammann said.

G.M.’s other overseas operations fared better than Europe. The company said its international unit, which is anchored by its large Chinese business, earned pretax income of about $700 million compared with $400 million last year. Its South American division reported pretax income of about $100 million, up from break-even in 2011.

G.M.’s share of its core American market has dropped since last year, primarily because of the resurgence of Japanese automakers that were constrained by inventory shortages in 2011 from the earthquake and tsunami in Japan.

In the first nine months of this year, G.M. had an 18.1 percent market share in the United States compared with 20 percent during the same period a year ago, according to the research firm Autodata.

One analyst said the company’s third-quarter performance was consistent with industry trends, particularly its troubles in Europe. “G.M.’s global performance is hardly out of line with any other automaker, whether it’s the company’s strength in the North American market or its weakness in the European market,” said Jessica Caldwell, an analyst with the auto research company Edmunds.com.

Shares Tumble on Weak Company Earnings Reports

General Electric and McDonald’s disappointed analysts and sounded cautionary notes about future global economic growth. That came on the heels of weak reports on Thursday from the technology giants Google and Microsoft.

With the shadow of the 25th anniversary of the 1987 stock market crash hanging over the market, share prices began dropping Friday morning and fell all day, leaving the Standard & Poor’s 500-stock index down 1.66 percent, or 24.15 points, to 1,433.19. It was the worst single day for the index since June 21, when investors were worried about the European debt crisis.

Corporate earnings have served as perhaps the strongest engines of economic growth since the financial crisis, and have helped fuel a broader market rally. The benchmark S.& P. index is still up 14 percent for the year.

While analysts have expected profits to grow at a slower rate, they are now concerned about slowing revenue, which can be a purer indicator of economic health. Among the quarter of the S.& P. companies that have reported earnings so far, revenue rose just 0.8 percent, below the 1.5 percent that had been anticipated.

“This is an indication of what consumers are doing globally, and investors clearly don’t like it,” said Kim Caughey Forrest, a portfolio manager at the Fort Pitt Capital Group.  “The consumer has decided not to spend that marginal dollar.”

Despite those concerns, Friday’s sell-off lacked the panic that has been a part of so many other big down market days over the last few years. This time around, shares moved down in an orderly fashion, and after it was over, some traders and investors said that while they were prepared for company profits to grow at a slower pace, they were not worried that earnings would disappear.

“It’s really a paring back of recent optimism, as opposed to a pessimism that will last for weeks,” said Ryan Larson, the head stock trader at RBC Global Asset Management. “This is a normal healthy thing for the markets to go through.”

One major threat is increasingly hanging over conversations across Wall Street: the fiscal cliff that the economy could go over if Congress and the White House do not find a way to avert looming tax increases and spending cuts by the end of the year. While the deadline has been expected all year, most investors have pushed it aside and assumed that politicians will reach a compromise.

“Now it’s becomes a more immediate issue, and everybody realizes it is going to be hanging over the market but not resolved,” said Ed Clissold, the chief global strategist at Ned Davis Research.

Mr. Clissold said he expected investors to think more about the fiscal cliff as the election approached, particularly if neither of the candidates talked about how they planned to deal with the problem.

The recent choppy market has come at the same time that several reports indicate that the economic recovery may be gaining firmer footing. The Bureau of Labor Statistics said on Friday that the unemployment rate fell in 41 states — the latest indication that the job picture may be improving. While data on existing-home sales on Friday came in lower than expected, most signs point to the housing market emerging from its long slide.

The bigger economic worries have generally come from abroad. Spain’s prime minister gave the market pause on Friday when he said that he had not yet decided whether to request a full bailout from the European authorities. But Spain is expected to take assistance if its situation grows worse.

The chairman of Goldman Sachs Asset Management, Jim O’Neill, said Friday that his models showed the global economy gaining momentum for the first time since late last year.

But for the immediate future, the focus continued to be on corporate profits and revenue.

At General Electric, analysts who expected revenue to rise $1.6 billion from the quarter a year ago were disappointed when they rose only $1 billion. Shares of the company dropped 3.4 percent on Friday, but they are up nearly 23 percent for the year.

The biggest disappointment this earning season has come from the technology stocks that have led the markets up for most of the year. Apple was heralded earlier this year when its stock market capitalization rose above $600 billion. But since hitting a high in mid-September, its share price has fallen 13 percent, bringing its market capitalization down to the more pedestrian $571 billion.

The technology-heavy Nasdaq composite index was hit by the steepest drop among the indexes on Friday, declining 2.19 percent, or 67.24 points, to 3,005.62. The Dow Jones industrial average fell 205.43 points, or 1.52 percent, to 13,343.51.

Many executives have been warning that future revenue and profits may end up growing more slowly than they had expected as a result of a recession in Europe, and the slowdown in China and elsewhere in the developing world.

So far, 17 companies have given what is known as negative guidance for future profit growth, and none have given positive guidance, a Thomson Reuters analyst, Greg Harrison, said.

The chief executive at McDonald’s, Donald Thompson, said Friday morning that so far fourth-quarter sales were “currently trending negative.”

Taking a step back, corporate profits are still expected to grow this year, though just in the single digits, rather than the double digits that have become common over the last three years. What’s more, most analysts expect that profit growth will go back up to the double digits in 2013.

“We had a great year so far, and perhaps it did get ahead of itself,” said Ms. Caughey Forrest of Fort Pitt. “This was a rational pullback based on rational information.”

DealBook: BlackRock Earnings Up on Strength in E.T.F.'s

Toru Yamanaka/Agence France-Presse — Getty ImagesLaurence D. Fink, chairman and chief of the money manager BlackRock.

The giant money manager BlackRock on Wednesday turned in a strong third-quarter profit despite the continuing uncertainty of investors.

The news comes at a time when many investors have been continuing to shy away from taking financial risks.

BlackRock benefited from strong interest among investors in less risky bond funds and passively managed exchange-traded funds. More money flowed into the company’s iShares E.T.F. business than at any time since BlackRock acquired the business from Barclays in 2009.

The firm said that on an adjusted basis, third-quarter profit rose 17 percent, to $610 million, from the period a year earlier, and 9 percent from the previous quarter. It earned $3.47 a share on a diluted basis, a record for the company, and exceeded the $3.32 a share expected by analysts surveyed by Bloomberg News.

On a generally accepted accounting principles basis, earnings increased 8 percent, to $642 million or $3.65 a share, from $554 million, or $3.08 a share, in the quarter a year earlier.

BlackRock has grown into the world’s largest money manager over the last decade thanks to its acquisition of iShares, but also as a result of growth in its traditional stock and bond mutual funds and in its more sophisticated offerings for larger, institutional investors.

In the latest quarter, the company increased the total pool of money it was managing for investors by 10 percent from a year earlier. Revenue across the company rose to $2.32 billion, up 4 percent from the previous quarter and also 4 percent from the third quarter of 2011. In the second quarter, both revenue and assets under management fell at BlackRock.

The firm’s chief executive, Laurence D. Fink, said in a statement that BlackRock “achieved these results through robust new business generation across each of our channels, with particular strength in growth areas on which we’ve focused, including retail and iShares.”

In recent weeks, Charles Schwab and Vanguard said they would lower the fees on some of their most popular E.T.F.’s. BlackRock followed suit on Monday, saying it would introduce a new lower-cost brand of E.T.F. for retail investors, the iShares Core Series. The move could help BlackRock maintain its status as the world’s largest E.T.F. manager.

DealBook: Wells Fargo's Earnings Jump 22%

At the height of the financial crisis, the mortgage business was a millstone for the banking industry. Today, it is a profit center.

Wells Fargo on Friday reported $4.9 billion in profit for the third quarter, a 22 percent jump largely led by a booming mortgage business.

The bank, based in San Francisco, continues to churn out record profit, having reported 11 straight quarters of gains in net income. The results of 88 cents a share narrowly beat the estimates of analysts polled by Thomson Reuters, who forecast earnings of 87 cents a share.

The bank’s revenue increased as well, sidestepping a common sore spot that has plagued most all of the nation’s biggest banks. Wells Fargo recorded $21.2 billion in revenue, which surpassed the $19.6 billion figure from a year earlier but was slightly below expectations.

The bank’s lending division led the growth, as consumers refinanced their mortgages to take advantage of record low interest rates. Wells Fargo, the nation’s largest mortgage lender, snared $188 billion in home mortgage applications, an 11 percent jump from the third quarter of 2011.

The bank’s chief financial officer, Timothy J. Sloan, underscored that “it’s more than just the mortgage business.” The strong results, he noted, were spread across the bank. The wealth management unit improved. So did the sales and trading business.

“We just have the great benefit of this diversified model,” Mr. Sloan said in an interview.

But investors were not fully impressed. On Friday, the bank’s shares closed down 2.6 percent to $34.25, reflecting concern about net interest margin, an important measure of the income the bank makes on its assets. The measure declined in part because the bank’s own investments suffered from an environment of low-interest rates.

Wells Fargo, along with JPMorgan Chase, began the bank earnings season on Friday. The nation’s other big banks, including Goldman Sachs and Bank of America, will report their results next week.

The Wells Fargo story line — that a deep lending effort breeds success — is rooted in broad federal stimulus efforts that have propped up the mortgage industry. An initiative by the Treasury Department is spurring refinancings. And the Federal Reserve has introduced a long-term plan to buy large batches of mortgage-backed bonds, which should help keep rates low.

Wells Fargo, more than five years after the mortgage crisis, has seized the opportunity. The bank now creates roughly a third of all mortgages in the country. Total outstanding loans jumped slightly in the third quarter to $783 billion while the bank’s home mortgage originations soared 56 percent to $139 billion.

The demand for credit came largely from refinancing, which accounted for 72 percent of all home loan applications. The Treasury program produced 14 percent of the mortgage volume.

Like other big banks, Wells Fargo makes home loans before selling most of them to investors after attaching a government guarantee. Those gains totaled $2.61 billion in the third quarter, up 225 percent from $803 million in the third quarter of last year.

The refinancing boom is fueling profits. Wells Fargo’s profit in the community banking division, which includes Wells Fargo’s retail branches and mortgage business, climbed 18 percent to $2.7 billion.

Despite the gains, the mortgage crisis continues to haunt Wells Fargo. The bank this summer agreed to pay $175 million to settle Justice Department accusations that it discriminated against certain minority homeowners from 2004 to 2009. Wells Fargo, which denied the charges, was also sued this week by federal prosecutors in New York, who claim the bank defrauded the government and lied about the quality of the mortgages it handled under a federal housing program.

Still, the legal troubles will barely nick the bank’s bottom line.

Like JPMorgan, Wells is having growth beyond mortgages. Wholesale banking, which includes the sales and trading business along with the corporate lending division, increased its profit by 11 percent, to $1.9 billion. While the unit operates in the shadow of the Wall Street investment banks, Wells Fargo has gradually extended its reach in that area.

“There are a lot of underlying positives that will continue to drive the earnings of this company,” said Edward R. Najarian, a senior bank analyst at ISI, a New York research firm.

Peter Eavis contributed reporting.