Investors eagerly await companies' earnings
NEW YORK -- Coming soon to Wall Street: a key quarterly exam on corporate profitability. At stake: the test results could determine if the stock market's recovery rally will fizzle or morph into a sustainable bull run.
On the eve of the second-quarter earnings reporting season, investors are bracing to see if the early bet they made on an economic rebound — and which jumpstarted a 40% stock rally — will actually be reflected in profit reports and companies' commentary about the future.
How much money companies made in the second quarter and how they made it will offer the first true snapshot whether the so-called "green shoots" recovery theory actually translated into better business conditions and bigger-than-expected earnings.
"The market is trying to figure out what the recovery is going to look like," says John Derrick, research chief at U.S. Global Investors. "Investors got encouraged. Now we are in a show-me stage."
Analysts are expecting earnings in the April thru June quarter to fall 34.5% for the eighth straight quarter of negative growth, Thomson Reuters says. All 10 sectors in the Standard & Poor's 500 index are on track for an earnings drop vs. a year earlier — the most sectors forecasting negative growth since Thomson started tracking in 1998.
But not all trends are negative. The number of companies issuing profit warnings vs. those issuing positive pre-announcements has shrunk noticeably in the second quarter vs. the January thru March quarter, says Thomson Reuters. There were only 1.6 negative warnings for every positive plug in the second quarter vs. 4.6 warnings for each positive in the first three months of the year.
Key questions investors hope to get bullish answers to:
•Is the economic recovery for real? Investors want to see the green shoots turn to flowers and not weeds, confirming their belief in a second-half rebound. "The key catalyst for stocks is any signs that point to a meaningful recovery," says John Bollinger of Bollinger Capital Management. Cost-cutting helped companies top expectations last quarter. This time the profits must come from revenue gains to confirm that recovery is not a fluke.
