Investors seek less-bad earnings in second quarter
— -- Investors may give companies a pass when they start to report second-quarter earnings en masse. But the pass isn't going to be free.
Alcoa's results, though, sum up how reporting season is expected to go. Investors know earnings for the quarter aren't going to be good. Companies in the Standard & Poor's 500 are expected to post 17% lower earnings compared with the second quarter of last year.
But investors hope the second quarter will be less bad than expected and look for companies to provide evidence they're positioned to profit once the economy turns around.
If earnings disappoint, the market's slowly crumbling gains since March could be in more jeopardy, says Charles Crane of Douglass Winthrop Advisors.
"Earnings are continuing the pattern of being less bad," S&P's Howard Silverblatt says. "But (eventually) less bad doesn't work anymore."
The factors that could help calm investors' fears about future earnings include:
•Ammo to persuade analysts to boost estimates. Investors want to find companies where analysts' expectations have been too bearish, says Dirk van Dijk of Zacks Investment Research. Analysts have been raising their estimates more frequently recently, a big change from last year, when they were slashing forecasts, he says.
•Signs of a healing financial sector. Of the 10 industry sectors, all but one, consumer staples, are expected to post lower quarterly earnings, van Dijk says. Hammered by falling commodity prices, materials companies are expected to post the biggest decline, 78% from a year earlier.
But investors were already braced for that, says Jim Paulsen of Wells Capital Management. The real wild card will be the financials, he says. Investors will want to see better-than-expected results from banks coming off the sector's loss in the second quarter of 2008. Better financial news from financial firms is key for the quarter to be less bad than expected, he says.
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