Second quarter earnings reports start today. S&P futures suggest a lower open of about two points. The weakness could easily be ascribed to global news, but we're going to suggest (with little substantiation) that it is due to the recognition that upcoming earnings reports will be lackluster.
Alcoa will report after the close today. Estimates are for a profit of $0.06 per share, down 81% from the $0.32 the company earned in the second quarter of last year. Regardless of whether Alcoa beats estimates, the year-over-year change is not pretty. That is the way it will be for a lot of companies.
Aggregate earnings for the S&P 500 are forecast to rise about 6%. That sounds decent, but it is due to a big gain in the financial sector simply because of an easy comparison that includes some huge losses last year. Most sectors and most companies are expected to post meager earnings gains or declines.
For example, the energy sector is expected to see earnings decline 15%. Utilities are forecast to have earnings drop 16%. Materials companies are expected to post a 12% decline. The health care, consumer discretionary, consumer staples, and telecom sectors are all forecast to post meager earnings gains of between 0.1% and 4%.
Technology is at an 8% growth forecast only because Google and Apple will have large earnings gains. Intel and Microsoft are forecast to post profit declines.
The financial sector is expected to post an earnings gain of over 50%, but as noted above, that does not reflect underlying earnings strength. It is simply a swing from a bad quarter last year.
The earnings problems are widespread. Commodity based companies have been hit by lower prices. Multinationals are struggling with weakness in Europe and a slowdown in Asia. US economic growth also slowed in the second quarter.
There will be a lot of companies reporting poor earnings, and guidance is likely to be uninspiring given the global headwinds that almost all companies face. CEOs will not want to sound overoptimistic and make promises they can't keep.
Normally, earnings season brings the prospect of a rally, as at least 60% of companies always report above analyst profit estimates. A relief rally a couple of weeks into the reports is not uncommon. This quarter, the prospects for a rally are reduced. The vast majority of companies will have lackluster reports.
There is no major US corporate news this morning, and no earnings reports. The only economic release is the generally ignored consumer credit report at 3:00 ET.
In Europe, the Spanish 10-year government bond yield hit 7% but panic did not ensue. European stock exchanges are down fractionally. The euro is down to 1.2308. There is reportedly movement towards a European-wide structure for tighter control of banks.
Europe remains on the radar, but US corporate earnings will be a major influence on the market over the next few weeks. That is not terribly exciting this quarter.
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