Earnings season opens with negative outlook

NEW YORK -- After a stock market sell-off Friday following another disappointing report that shows the nation's job-generation machine is in need of repair, Wall Street will turn its attention today to the next key market-moving data point: corporate profits.

The second-quarter profit-reporting season kicks off today, when aluminum giant Alcoa reports. The fate of the stock market will be closely intertwined with how much money U.S. companies made in the April-through-June period, a tough stretch when both the economy and job market showed signs of weakening. Investors will also be listening closely to what CEOs say about the outlook for the rest of 2012.

Earnings season is always important. But this latest round of profit news will carry more weight. Investors are looking for any shred of good economic news amid continued turmoil in Europe, signs that white-hot China is cooling off, and a string of disappointing data at home that point to slowing growth, such as a still-weak jobs market in June and a key manufacturing gauge that showed contraction rather than growth.

"Earnings season will be very, very important, especially in terms of company guidance and how they are managing through this soft patch and deceleration in China and Europe," says Quincy Krosby, market strategist at Prudential Financial.

Given all the turbulence, expectations for earnings are muted, with many analysts cutting their profit projections for the quarter in recent weeks. Analysts are now projecting growth to turn negative in the second quarter. If the season ends with the current estimate of earnings slipping 1.01% for companies in the Standard & Poor's 500-stock index, it would be the weakest since the third quarter of 2009, S&P Capital IQ says.

"This earnings season has the worst (projections) since the Great Recession," says Christine Short, a senior manager at S&P. Part of the weakness has to do with a tough year-over-year comparison with the second quarter of 2011, when profit growth topped 19%.

Still, Short thinks companies will report better-than-expected numbers: "We're more likely to see growth in the low-single digits." With expectations low, stocks could rally if companies top projections, adds David Kelly, chief global strategist at JPMorgan Funds.