U.S. financial stock damage may snuff out profit gains

By Herbert Lash

NEW YORK (Reuters) - Corporate America's profit growth for 2007 is threatened by the carnage among bank earnings, gored by more than $100 billion (50 billion pounds) in mortgage-related write-offs in the fourth quarter.

The last quarter of 2007, forecast for most of last year to mark a return to double-digit earnings gains, has now turned sharply negative because of an expected 91 percent decline in financial stocks, according to Reuters Estimates.

A decline in earnings growth in 2007 would be the first time since 2001, when earnings declined 15.79 percent.

"There has been a slowdown in the rest of the economy and the growth of earnings, but it's all the financials and these write-offs have just destroyed these numbers for the year," Milton Ezrati, senior economic and market strategist at money manager Lord Abbett & Co.

Fourth-quarter earnings are projected to decline 17.6 percent, compared with expectations of 11.5 percent growth at the beginning of the quarter on October 1, Reuters Estimates said on Monday.

For 2007, earnings are now expected to post a 1.2 percent decline. On October 1, analysts projected an 8.3 percent gain for the year, data compiled by Reuters Estimates shows.

The fast-dimming profit view is one of a bounty of worries weighing on stock prices. The benchmark Standard & Poor's 500 Index .SPX is down 7.5 percent year to date, and with two days left to the month could well notch their worst January on record, surpassing a 7.65 percent drop in 1970.

However, Ezrati said banks and other companies hit by mortgage-related losses have probably written too much off because they must mark the value of their assets to derivative indexes pummeled by the sour mood on Wall Street.