Corporate Profits Up Amid Wall St. Slump
By Haitham Haddadin
NEW YORK (Reuters) - Any which way you slice it, it's likely that Corporate America's second-quarter financial scorecards will show some improvement.
But hold the bubbly, analysts say.
Corporate profits are creeping up -- but at a still-tepid growth rate that's unlikely to be the harbinger of greatly improved earnings for the current quarter and beyond. And, experts say, it won't be much help for stock market investors.
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"At the start of the second quarter, we said 'Enjoy the second-quarter numbers, but don't enjoy them too much,"' said Chuck Hill, director of research at market researcher Thomson First Call. "They will be strong but will not give a big indication of what's coming in the second half."
Quarterly earnings reports kick into high gear in mid-July, with profits for companies in the Standard & Poor's 500 index (CBOE:^SPX - News) expected to rise 3 percent for the April-to-June period, according to First Call.
While this is nothing to get excited about, it handily beats the first quarter, when earnings fell 11.5 percent compared with year-earlier results, and the year-ago second quarter when they were down 17 percent.
"We think the second quarter sequentially or year-over-year would be up. On a year-on-year basis, that will be the first up quarter after five consecutive down ones," Hill said.
TRUST BUST
But many investors now are wondering how trustworthy the numbers being reported by companies are in the first place, as corporate accounting scandals have hit marquee names such as telecom giant WorldCom Inc. (NasdaqNM:WCOME - News) and other big companies.
"That is huge. Even if earnings are strong, does the market pay for them? That will continue to weigh on the market for a while," said Michael Kayes, chief investment officer at Eastover Capital Management, which oversees $300 million. "It will take a long time to rebuild trust."
The crisis of confidence, coupled with fears that profit growth would be soggy, pushed Wall Street deep into bear market territory. Stocks may remain under a cloud if economic recovery, as a rising number of pundits expect, runs at a much slower clip than the rapid 5.8 percent pace set in early 2002.
Conventional wisdom on Wall Street has it that the profits picture would dramatically improve this year as rock-bottom interest rates and tax cuts boost the economy and the corporate bottom line. This was supposed to whisk stock indexes like the tech-laden Nasdaq Composite (NasdaqSC:^IXIC - News) and the S&P 500 from the multiyear lows where they are languishing.
Not all subscribe to this point of view. A sustained rally would need a drastic improvement in earnings to materialize, says Charles Payne, market analyst at Wall Street Strategies.
"The economy is definitely improving, but it's not accelerating. I think that might be bothering a few people," said Payne, referring to the latest stock sell-off. "This market is in such serious turmoil that we really need a series of blockbuster numbers to turn it around."
NO BIG SURPRISES
So-called corporate warnings -- admissions of disappointing results -- are running at a much slower pace than they normally do. The ratio of negative to positive is 1.2 versus 4.1 last year, and 1.6 at the same point in the first quarter.
But Hill and others say profits won't be off to the races.
"It's positive we have not had a lot of pre-announcements, but expectations will have to come down," Kayes said. "I don't forecast a lot of outperformance or big positive surprises."
Analysts now say investors banking on robust earnings growth in the second half may be disappointed. The S&P 500 companies, according to current forecasts, are expected to post profit growth of 16.5 percent in the third quarter, and 28.8 percent in the fourth.
But those forecasts will have to come down, just as second-quarter projections have been trimmed, analysts say.
"We expect significant trimming of third and fourth-quarter earnings estimates," Hill said. Most of the cutting will be due to lower capital spending by companies, he said.
Analysts currently expect that, for the full year, profits for the S&P 500 will rise 6.5 percent. The final numbers likely will come in at 4 percent, Hill said. This is in stark contrast to average profit growth of 8.9 percent in the 1990s, but still an improvement from last year's 17.3 percent decline.
Nowhere is earnings optimism felt more than in the technology sector. Tech earnings, collectively, fell 27 percent in the first quarter but are seen rising 27 percent in the second quarter. And while analysts previously had pegged third-quarter earnings to be up 132 percent, compared with a year earlier, their forecasts are now down at a still whopping 110 percent and 69 percent for the third and fourth quarters respectively.
"This is where things are most out of whack ... Comments from companies have us worried," Hill said, citing trimming of forecasts from tech giants such as chip maker Intel Corp. (NasdaqNM:INTC - News). "Tech led us out of the [1990 recession] and analysts expect business as usual. But this is a different kind of recession."
Doubters say growth in the world's top economy will at best be slow. At worst, according to a minority view, it may face the dreaded "double dip," where the economy sinks into recession, recovers, then dip backs into recession due to a relapse for consumer demand.
The strong rebound in the first quarter was mostly due to inventory rebuilding. In the second half, recovery depends more on final demand from companies and consumers. The danger, Hill says, is that the growth is gradual enough that corporate layoffs persist and become a drag on consumer spending, while spending by companies is still down.
"We are at this critical point in the recovery ... We don't know what final demand is looking like -- it is being masked by this inventory rebuilding," Hill notes. "This may tip the economy back into recession but now odds say no double dip." |
