Wall Street was struck by a bout of profit taking today, as Aetna and Honeywell’s disappointing full-year earnings forecasts weighed on market sentiment.

This could be due to the fact that the stronger-than-expected second-quarter earnings were completely priced into the market last week. Equity analysts may now be beginning to focus on the third- and fourth-quarter and full-year earnings of US companies in order to understand whether there is anymore upside left in the market.

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Aetna, the third-biggest health insurer in the US, plunged 5.71% to $24.93 a share this afternoon, after surprising the market by slashing its full-year earnings forecasts for a second time in two months on the back of higher-than-expected medical costs.

‘We continued to see upward pressure on medical costs beyond what we projected in early June, which we believe is driven in part by changing provider behaviour in the face of a deep recession,’ said its Chief Executive Officer Ronald Williams. ‘This is disappointing, but it can be fixed.’ [1]

Aetna said it expects full-year earnings to come in between $3.55 and $3.70 a share, down from initial forecasts of $3.85 to $3.95. The company’s second-quarter net income wasn’t encouraging either, however, down almost 28% to $346.6 million, or 77 cents a share. Excluding one-off items, second-quarter earnings were 68 cents a share, substantially lower than Reuters’ expectations of 78 cents.

Revenues over the period were up by nearly 10% to $8.7 billion, nevertheless, roughly in line with Reuters’ average analyst forecast of $8.6 billion.

In the meantime, Honeywell International, the world’s biggest maker of cockpit electronics, eased 0.3% to $33.89 a share after revealing a 38% drop in earnings and foreseeing full-year earnings at the lower end of its expectations.

The company predicts that its 2009 net profits will come in at $2.85 a share, down from an earlier forecast of between $2.85 and $3.20. Honeywell also said that third-quarter earnings are likely to come in between 70 cents and 75 cents a share, below Reuters’ analyst projections of 79 cents.

Its second-quarter income, meanwhile, came in at $450 million, or 60 cents per share, down 38% from the $723 million, or 96 cents per diluted share, delivered a year earlier. Revenues fell 22% to $7.57 billion, trailing expectations.

Elsewhere, Verizon Communications made the headlines, announcing quarterly profits of $3.16 billion, down 7% from $3.4 billion a year ago. Revenue increased to $26.86 billion from $24.1 billion as a result of wireless subscriber growth. Its shares fell 2.6% to $30.67.

Electronics retailer Radioshack delivered second-quarter earnings of $48.8 million, or 39 cents a share, well ahead of Reuters’ expectations of 29 a cents a share and the previous year’s earnings of 32 cents a share.

Radioshack’s second-quarter revenues fell 2.9% to $965.7 million, while same-store sales declined 4% on the quarter. The retailer blamed the decline on weaker consumer spending on wireless accessories, digital-to-analogue converter boxes, GPS products, music players and digital cameras. Its shares tumbled 7.5% to $14.85 a share.

The US macro front was very upbeat; purchases of new homes surged 11% to an annual pace of 384,000 in June, the biggest gain in eight years, suggesting that the US housing slump that began in 2005 has continued to stabilise.

New house purchases were also ahead of Bloomberg’s average forecasts for a 2.9% rise to 352,000, yet the better-than-expected housing data failed to have any significant effect on the market; by 3:30pm (London time), the Dow Jones Industrial Average had fallen 33.7 points (-0.37%) to 9059.54, while the S&P 500 had declined 4.03 points (-0.41%) to 975.23. The Nasdaq was the worst performer, however, down 13.61 points (-0.85%) to 1585.45.

Source: [1] Bloomberg News (27 July 2009)

By Anthony Grech, Research Analyst, IG Index.

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