macromust Steve Massocca, Wedbush Securities, weighs in on what's driving the Dow down triple digits today, as earnings season gets over to a rocky start

Earnings 'Stink' So Far, But Stock Selloff May Be Limited

Published: Friday, 19 Oct 2012 | 2:28 PM ET

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By: Patti Domm
CNBC Executive News Editor

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Stocks got slammed Friday by worse-than-expected quarterly results, but the damage may be limited because Wall Street was already expecting a nasty earnings season.

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The current estimates—as well as actual reports—now anticipate a 1.8 percent profit decline among the S&P 500 companies for the third quarter, the first decline since 2009.

The big surprise so far has been the extent of the earnings hits felt by the technology sector, with its international exposure and the slowdown in PC sales.

Sixty percent of the S&P companies that had reported as of Thursday saw earnings per share above estimates, Thomson Reuters says. But that is below the typical 62 percent and below the recent average of 67 percent.

Even more of a concern is that a substantial number of companies have bombed on revenues, with top line misses an unusually high 58.6 percent, above the recent trend of 45 percent and 10-year trend of 38 percent, according to Thomson Reuters.

“I still feel like it’s telling us what we already know," said Thomas Lee, chief U.S. equity strategist at J.P. Morgan. "Earnings stink because the global economy slowed down. Europe is in recession, and China slowed down.”

Stocks earlier this week flirted with 2012 highs, even as a number of major companies saw earnings or revenues—or both—fall short of estimates. But the tide turned Thursday as stocks traded slightly lower while investors digested Google’s [GOOG 681.79 -13.21 (-1.9%) ] big earnings shortfall and its shares weighed on indexes.

By Friday, however, a series of blue chips led the market lower, with misses by Dow stocks Microsoft [MSFT 28.64 -0.855 (-2.9%) ] , General Electric [GE 22.03 -0.78 (-3.42%) ] and McDonald’s [MCD 88.72 -4.14 (-4.46%) ] smacking their stocks and taking the Dow sharply lower. GE is the minority shareholder of NBCUniversal. (Read More: Track Earnings Here)

But strategists make a case that some of these stumbles are already in the price of stocks.

“We surveyed clients two weeks ago," said Tobias Levkovich, chief U.S. equity strategist at Citigroup. "Eighty percent told us earnings estimates are too high.”

Going into the earnings season, analysts had expected the companies that had exposure to foreign currencies, China and Europe to be the most likely to misstep. The domestically oriented companies, the theory went, would be less inclined to miss because of a slightly stronger U.S. economy and an increasing willingness by American consumers to spend.

But McDonald’s profit pain also came from the U.S. The global fast food chain’s earnings fell about four percent, due to the stronger dollar’s impact on international result but also “broad competitive activity” in the U.S.

McDonald’s revenue in the U.S. in stores open 13 months grew by 1.2 percent while globally, restaurant revenue rose 1.9 percent, the slowest pace since 2003.

“I think the U.S. surprised the most on same store sales, as well as on the margin front,” said Lazard Capital Markets restaurant analyst Matthew DiFrisco on CNBC’s “Squawk on the Street.” “I think that’s what’s weighing on the shares.”

U.S. restaurant chain Chipotle [CMG 243.00 -42.93 (-15.01%) ] also saw sluggish trends in its restaurants, and its earnings miss sent its stock skidding in a double digit decline Friday.

The earnings performance of financials, health care and staples has been the best.

“We started off strong, as the financials generally had a really good earning season,” said Bill Stone, chief investment strategist at PNC Wealth Management. “The staples look like they’ve done well but again we’re early in the season.” According to Thomson Reuters, financial companies beat earnings estimates 72 percent of the time this quarter, while consumer staples beat 70 percent.

But on a revenue basis, 82 percent of health care companies had negative surprises, while 83 percent of industrial companies had misses, and 67 percent of materials companies’ revenues came up short, according to the Thomson Reuters data.