High profile earnings letdowns sour investors

• Disappointing profit from big-name companies turns investors cautious on stocks
• Google, General Electric, Microsoft, Chipotle and McDonald's have all come up short on profit
• Investors willing to endure the short-term disruption can still find compelling values

A rash of earnings bombs among big-name companies is making it clear that this earnings season is going to be a rocky one.

Disappointing earnings reports from a who's who of influential stocks — including Google, General Electric, Microsoft, Chipotle and McDonald's — have investors worried that the third-quarter earnings season, already expected to be underwhelming, is going to be something worse.

Earnings from many of the large companies investors watch closely "have not been good," says Robert Maltbie of Singular Research. "The market is responding to that."

Such high-profile earnings misses are making investors fret over decelerating earnings growth even more, and prompting some to start thinking about whether it's time to lock in what's left of stock market gains this year, says Michael Farr of Farr, Miller and Washington.

The angst was apparent last week. The Dow Jones industrial average shed 205 points Friday to 13,344, a 1.5% drop that was the biggest in four months. Even so, the Dow is still up 9.2% this year.

Investors had been braced for the earnings season to be somewhat of a disappointment, especially relative to the string of record-breaking corporate profits the past few quarters. But earnings reports are pounding stocks now because of:

* Reinforcement it's going to be a blah quarter. All told, analysts are expecting companies in the Standard & Poor's 500 index to report essentially no growth — 0.04% — making it the worst growth since the third quarter of 2009, says S & P Capital IQ. That's quite a letdown from the 2.3%, 7.4% and 8.2% growth of the previous three quarters. During the third quarter of 2011, earnings grew 17.3%.

* Fixation on a few stocks. Some think investors are allowing the disappointments of celebrity stocks to distract them from what's otherwise been a stable period of earnings. "The $600-a-share stocks of the world are getting trashed," Maltbie says, referring primarily to Google and Chipotle, which are famous for their triple-digit per-share prices. "They ran up, and now they're coming back to the rest of the world."

* Expectation a pullback was overdue. Stocks typically have 5% corrections at least twice a year on average, says David Sowerby of Loomis Sayles, so the recent sell-off is to be expected given the market's rally this year. "We're due after such a big run," he says.

Despite the worries over the high-profile stocks, earnings are actually trending a bit better than expected. Coming into the quarter, on Oct. 1, analysts had expected earnings to decline 1.8% from a year earlier, a guess that's looking pessimistic at this point. Meanwhile, analysts are forecasting that Corporate America's profit hit parade will resume in the fourth quarter, with forecasts of 9.9% growth during the period.

Investors willing to endure the pain during this earnings reporting season may find some stocks that pay off richly in the future, says Doug Sandler of Riverfront Investment Group. "Value is never realized in the short term," he says. "Value over time is the only thing that works."