By suspending earnings projections, the likes of General Electric Co. (GE) and Microsoft Corp. (MSFT) recently acknowledged that - in the flux of a financial crisis and economic recession - estimates are little more than educated guesses.

As a consequence, investors are taking a "show-me" approach, waiting for a company to divulge results rather than trading on expectations or even on rivals' results. For most investors in the current climate, there are too many unknowns to take big positions ahead of an earnings announcement, and projections from companies and analysts have been startlingly off the mark.

Since the current bear market began in the second half of 2007 and especially in recent months, analysts and corporations have consistently underestimated the effects of the credit freeze and the resulting slowdown in business worldwide. For companies, there's little upside to providing guidance if they aren't confident those numbers can be met.

"A lot of companies aren't even giving guidance a shot," said Kelli Hill, a large-cap portfolio manager with Ashfield Capital Partners. "GE was the first to do it and they're all taking a cue. It makes the whole valuation aspect just that much more difficult."

Complicating matters further is the decline of Wall Street firms, a trend that has accelerated in recent months following the downfall of Lehman Brothers Holdings Inc. (LEHMQ). Confidence in Wall Street's foresight on earnings is shrinking, too.

During the usual bull and bear market cycles, Wall Street research operations grew rapidly and in tandem with trading desks. Not only is the culture of trading around a penny "miss" or "beat" in an earnings report gone, but the entire Wall Street banking world is shrinking rapidly. Monday's departure of six more analysts from Wachovia Securities is a sign of the times.

Trading action in shares of International Business Machines Corp. (IBM) and Microsoft provide examples of the show-me mentality that now prevails. The two Dow Jones Industrial Average components had traded quietly in the first three weeks of the year, until the announcements of quarterly results caused the former to rally and the latter to sell off.

Earnings for companies directly exposed to the banking system are particularly difficult to predict, because of an imminent plan from the Treasury Department that is likely to change the way troubled assets are valued and may dilute shareholders. While the financial sector represents less than 10% of the market value of the S&P 500, there are still 85 constituent financial companies.

"We don't even look at analysts' or management estimates for financials," said Mark Coffelt, chief investment officer at Empiric Funds in Austin, Texas. "I don't know how anyone could have a reasonable expectation of their earnings. A lot depends on how assets are valued on their balance sheets."

 
   Analysts Miss Badly

In general, fund managers say they now use Wall Street estimates only as a rough guide in determining their expectations, as recent data show the estimates to be almost completely unreliable.

As of Monday, the combined profits for the 217 companies of the S&P 500 that had reported quarterly results were a staggering 42% below Wall Street estimates, according to Thomson Reuters. The consensus Wall Street estimate was accurate for only 20 of those corporations.

Many observers believe consensus Wall Street estimates for various sectors in 2009 are still too optimistic. According to Citigroup, current estimates from sell-side analysts for companies in the Russell 2000 index anticipate an earnings contraction of only 6.2% for 2009. That seems unlikely, considering small-caps are more susceptible to weak credit and a weak economy than most others.

The fact that fewer companies are providing guidance could be complicating the efforts of analysts. In the latest period, 55 of the 217 companies that had reported as of Monday issued second-quarter guidance, down from 65 at the same juncture last year.

While guidance suspension can prompt a selloff, investors say it may be a prudent move for corporations that want to avoid focus on their short-term business trends. Plus, traders say, longer-term moves have more to do with the balance sheet than the income statement.

For those companies that are willing to stick their necks out, the short-term market reactions are often positive. Companies that are reaffirming guidance, such as Colgate-Palmolive Co. (CL), Automatic Data Processing Inc. (ADP) and United Technologies Corp. (UTX), have mostly seen immediate and lasting stock gains.

"There are more companies dropping 2009 guidance altogether, so the ones that are reaffirming earnings have really stood out," said Hank Smith, chief investment officer for wealth management firm Haverford Investments.

Notably, downward guidance has been the least prevalent for health care and consumer staples so far in the fourth-quarter earnings season, according to Citi. But neither of those sectors has seen sharp gains, with Citi expecting a plunge in earnings momentum "just like every sector during recessions."

-By Geoffrey Rogow, Dow Jones Newswires; 201-938-5360; geoffrey.rogow@dowjones.com

-By Rob Curran, Dow Jones Newswires; 201-938-5176; robert.curran@dowjones.com