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Earnings prospects for 2009's second half will be scrutinized

Investors already expect second-quarter results to be dreary, so what they'll be paying attention to is whether executives forecast their companies' bottom line improving and the recession lifting.

July 13, 2009|Walter Hamilton

NEW YORK — With corporate earnings season set to hit full stride this week, the stock market will be paying far more attention to what companies say about the quarters ahead than to the one that just ended.

Investors have long known that second-quarter financial reports will be dreary. Overall profits for the biggest U.S. companies are expected to be down more than one-third from a year earlier -- the eighth consecutive quarterly drop. In hard-hit sectors, including financial services and raw materials, earnings could be off by more than half.

But Wall Street is more interested in what companies divulge about their prospects for the rest of 2009 -- whether executives forecast their businesses improving and the recession lifting.

"This earnings season is of such crucial importance," said Dan Greenhaus, market analyst at Miller Tabak & Co. in New York. "So much attention, more so than even usual, is being paid to it."

As bad as corporate America's bottom line has been lately, the results would have been even worse without aggressive cost cutting -- something that can't last indefinitely, said Marc Pado, U.S. market strategist at Cantor Fitzgerald.

The torrid spring rally in stocks was premised on the notion that the economy would improve in this year's second half. Most economic indicators have pointed to a gradual easing of the downturn. But the market has been growing anxious.

Stocks have slumped in the last month as investors have worried that the economy isn't mending as quickly as they had hoped.

The Dow Jones industrial average fell for a fourth consecutive week last week following a recent report showing an unexpected drop in consumer confidence last month and retailers reporting disappointing June sales.

Wall Street now is looking for evidence that inventories are fully depleted and that companies are boosting production -- even modestly -- to satisfy increasing demand, he said.

"That's going to be the theme for these quarterly earnings reports," Pado said.

Analysts predict that earnings at Standard & Poor's 500 companies will fall an average of 36% in the second quarter, according to Thomson Reuters. That would make it the second-worst quarter in the current downturn after the final three months of 2008.

Profits are expected to drop 78% in the materials sector, 64% in energy and 55% in financial services.

"By any measure, it's not going to be a good earnings season," said John Butters, director of U.S. earnings research for Thomson Reuters.

There is a potential piece of good news: Increases and decreases of estimates by research firms of individual companies' earnings are running about even, said Dirk Van Dijk, chief equity strategist at Zacks Investment Research.

Six months ago such forecast downgrades topped upgrades 5 to 1, and the ratio was 20 to 1 in some sectors.

Corporate earnings overall are predicted to fall 21% in the third quarter from a year earlier and to rebound sharply in the fourth quarter, according to Thomson Reuters.

This week could yield important clues about financial, technology and industrial stocks. Goldman Sachs Group Inc. is scheduled to report results Tuesday, followed by JPMorgan Chase & Co. on Thursday. Bank of America Corp. and Citigroup Inc. are expected to announce their results Friday.

Intel Corp. is set to report Tuesday, followed by IBM Corp. on Thursday and General Electric Co. on Friday.


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