By Kate Gibson
Stock analysts generally agree the upcoming second-quarter
earnings season will be bleak. But they're at odds over whether the
dreary outlooks will lead to upsets to the upside or whether the
market has set itself up for a fall.
"The outlook is pretty bad. There is a credible opportunity for
the news to come out better," says Art Hogan, chief market
strategist at Jefferies & Co.
"Several sectors are poised to beat depressed expectations,"
said Dan Greenhaus, an equity analyst at Miller Tabak & Co.
Aluminum maker Alcoa Inc. (AA) unofficially kicks off the
earnings season mid-week. Analysts anticipate S&P 500 (SPX)
operating earnings will fall 36% from a year ago, led by a 78%
plunge in materials profits, according to FactSet Research.
Energy earnings are expected to fall 67% and profits of consumer
discretionary companies, a sector that includes retail and auto,
should drop 36%, FactSet says.
Rising stock valuations have raised the bar for earnings
significantly, and the market is poised to tumble if results
disappoint. First-quarter reports that Wall Street termed "less
bad" had been enough to support the market's climb off its early
March lows. That's no longer the case.
"The market is at a crossroads, and the audience is going to be
harder to please this time. People want to see legitimate top line
growth, or at least guidance to that effect," said Alec Young,
equity strategist at S&P Equity Research Services.
Young says earlier results from footwear-maker Nike Inc. (NKE)
and shipper FedEx Corp. (FDX) show it's tough for companies to
expand the top lines of their income statements - in other words,
their revenues.
"It doesn't feel as if revenue growth is around the corner," he
said.
Nike earlier this month reported its fourth-quarter profit fell
30%, and while the Beaverton, Ore.-based company beat expectations,
sales fell and it said orders for future months are down
substantially versus last year. .
Tech to surprise?
One source of pleasant surprises may come from technology.
Even though earnings from IT companies in the S&P 500 are
expected to fall 29%, the sector may hold the brightest hope for
topping forecasts.
Jefferies' Hogan says the sector could top projected earnings
declines by as much as 10%, which would bring its anticipated fall
from an earnings drop of more than 20% to something in the
teens.
"We need technology in a slow growth economy. If we're going to
have a slower growth economy in 2010 and 2011, as we deleverage,
tech will be very important. Equipment is getting older, and the
new operating system coming out in the fall drives upgrades," he
said.
Differing forecasts
For the second quarter, analysts polled by FactSet anticipate
all sectors will report profit drops. Health care, consumer staples
and utilities will perform the best, with profit drops of between
3.5% and 7.1%.
So far, investors have got a mixed set of results on
earnings.
FedEx offered dreary fourth-quarter losses, and predicted its
fiscal first-quarter earnings well under Wall Street's
estimates.
More positive results came from Research in Motion Ltd. (RIMM),
which on June 18 reported a 33% rise in fiscal first-quarter
earnings, topping expectations.
S&P does have a positive outlook for stocks 12 months ahead,
but in looking to the end of the year, "it'll be hard to eclipse
the highs of a few weeks ago," Young said.
Sliced differently, the profit picture doesn't look as bad.
Standard & Poor's projects operating earnings for the
S&P 500 to fall 17% in the second quarter from the year-ago
period.
For the S&P 1500, which by and large mirrors the S&P 500
but includes 400 midcap companies and 600 small cap firms, S&P
forecasts a drop of 19%.
For that wider index, materials profits are slated to fall 69%
and energy profits to dive 62%. Consumer discretionary profits
should jump 23%, while consumer staples profits gain 3%.