July 8, 2012 / 3:59 PM / 5 years ago

Analysis: Investors brace for shaky U.S. earnings season

6 Min Read

NEW YORK (Reuters) - Earnings season begins on Monday with U.S. companies facing a litany of issues that could make second-quarter reports look dismal.

Corporate outlooks are at their most negative in nearly four years and companies that have already reported have shown lackluster growth. Nearly two dozen S&P firms have already cited Europe's woes - which seem to be worsening - as a concern.

In addition, more than 85 members of the Standard & Poor's 500 .SPX lowered expectations in the last several weeks and the quarter's expected earnings growth of 5.8 percent is entirely due to Apple Inc (AAPL.O) and a big earnings gain for Bank of America Corp (BAC.N) due to a mortgage settlement last year.

The majority of S&P 500 results will be in the next four weeks, beginning with aluminum company Alcoa Inc (AA.N), due to report following Monday's close.

The primary worry is whether the effect from Europe, along with the emerging slowdown in China, has been factored in to analyst estimates, which are down sharply since April.

"It's natural to expect that somehow the U.S. corporate sector, which has been a bright spot in this recovery, is not going to emerge unscathed," said Brian Gendreau, market strategist with Cetera Financial Group in Florida.

Europe accounts for about 15 percent of S&P 500 sales. Since the beginning of April, just two sectors have shown an increase in growth forecasts. One is telecommunications, which has no sales exposure to Europe, according to a Bank of America/Merrill Lynch research note.

The other is technology, which has the highest exposure at about 25 percent. But much of that sector's earnings growth will come from Apple. Without Apple, tech-sector growth is estimated at 3.1 percent, compared with 7.9 percent with Apple included, according to Thomson Reuters data.

Of the 85 companies that lowered expectations during the pre-reporting season, at least 20 cited Europe's problems as a reason for reducing estimates, according to a Thomson Reuters analysis.

"This is kind of the wild card," said Brad Sorensen, director of market and sector research for the Schwab Center for Financial Research in Denver.

"We've already gotten a lot of the negative news out in the market. There is the risk that things have deteriorated more quickly in especially the export market than previously believed."

Currency problems and slack global demand were the next most mentioned issues - both of which can be traced, in part, to Europe. Gains in the dollar, especially versus the euro, are expected to hit companies with a large portion of business overseas.

Corporate outlooks are the most negative they've been in years. Negative-to-positive earnings guidance is now at 3.3 to 1, the worst since the fourth quarter of 2008, according to Thomson Reuters data. A week ago, it was at 3.62 to 1, the worst since 2001.

The silver lining? Investors have already endured sharp selloffs related primarily to worries about Europe. With euro zone leaders coming to grips with the extent of the debt crisis by moving toward a common bank regulator and agreeing to buy bonds of troubled European countries, the stock market may look past corporate disclosures of Europe-related woes.

Stocks are still up for the year but the S&P 500 gave up 3.3 percent in the second quarter, largely due to worries about Europe. This may mean the worst news has been anticipated by investors.

"Companies are guiding lower and analysts overreact to that, so that increases the probability of a surprise" to the upside, said Mike Jackson, founder of Denver-based investment firm T3 Equity Labs.

He sees a high probability that the telecommunications .GSPL sector will see upside surprises in second-quarter results. This sector's growth is expected at 0.9 percent for the quarter but at the beginning of April it was expected to show a year-over-year decline of 11.6 percent.

The Apple Factor

S&P 500 .SPX second-quarter earnings expectations are down from forecasts for 10.1 percent growth back at the start of the year and down from growth of 8.1 percent in the first quarter, Thomson Reuters data showed.

Earnings growth is estimated to decline 0.4 percent without the benefit of Apple and Bank of America.

Revenue is seen up just 1.7 percent, down from 5 percent growth in the first quarter, the data showed.

Among companies who have already reported for the last quarter, the trend is weaker when compared with the previous quarter.

Of the 25 Standard & Poor's 500 .SPX companies that have already reported for the latest quarter, more companies have guided lower than in the previous quarter.

"The early reporters ... are having a tough time raising guidance after reporting, and I think they're going to be a good proxy for the other 475 companies that have yet to report," said Key Private Bank Director of Research Nick Raich.

Among them: Federal Express (FDX.N), which reported an adjusted quarterly profit that beat expectations but gave a profit outlook that fell short of estimates.

Of the companies offering guidance among the early reporters, more than 70 percent have guided lower, compared with 44 percent in the previous quarter, Raich said.

So far, 16 of 25 companies have beaten analyst earnings expectations.

S&P 500 sectors expected to see the biggest decline in earnings estimates are utilities .GSPU, down 16 percent from a year ago; and energy .GSPE, down 14.8 percent. Both sectors are suffering from steep falls in energy prices.

The sectors expected to see the biggest gains are financials .GSPF, up 54 percent; and industrials .GSPI, up 10.2 percent, though financials are expected to benefit from the turnaround in Bank of America's results.

Editing by Bernard Orr

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