NEW YORK – For Corporate America, its the season of low expectations.
Companies have been scaling back their earnings forecasts for weeks as part of a quarterly cat-and-mouse game with financial analysts. Its not OK just to report a strong second-quarter profit – they also need to beat analysts forecasts. And companies are eager to do just that.
Earnings season gets started Monday, when aluminum giant Alcoa Inc. reports results after the stock market close.
Wall Street analysts now predict that earnings for companies in the Standard & Poors 500 rose 3 percent in the second quarter compared with a year earlier, according to a survey by S&P Capital IQ. But as recently as April 1, they thought earnings would rise nearly 7 percent. At the start of the year; they forecast a 9 percent increase. Companies that provide raw materials and technology firms are expected to drag down growth.
Another reason for the drop? Eighty seven of the 111 S&P 500 companies that offered guidance were negative.
You really have to take it with a grain of salt, said Christine Short, associate director at S&P Capital IQ. Last quarter, she said, 65 percent of companies beat financial analysts estimates.
Quarterly growth over the past 15 years has averaged 8 percent. In the last eight quarters, analysts estimates have underplayed growth by about 4 percentage points, according to Short. That would mean earnings in the second quarter just ended are more likely to rise around 7 percent.
There are plenty of areas that could help lift corporate profits. Americans confidence is up and they are willing to spend again. The housing market rebound is also expected to push up earnings of home construction companies such as DR Horton Inc., Lennar Corp. and PulteGroup Inc. The consumer discretionary sector, which includes retailers like Target Corp., entertainment companies like Walt Disney Co. and the homebuilders, is expected to see growth of 12 percent.
The financial sector is also expected to see a jump, with 16 percent growth from a year earlier.
An aggregate of the S&P 500s earnings per share is estimated at $26.41, up from $25.67 reported in the second quarter last year. That would be the second-highest quarterly earnings, only topped by the all-time high of $26.71 during this years first quarter.
Howard Silverblatt, a senior index analyst with S&P Dow Jones Indices, said the earnings should propel the S&P 500 index past its record close of 1,669.16 on May 21.
The guidance has been negative, but not as much as historically, Silverblatt said.
Still, there are concerns. Short points out that earnings are only part of the picture. Shes scrutinizing revenue growth, which is predicted to slow by 0.3 percent from last years second quarter.
Companies have gotten very good at managing costs – which is of course important – but its unsustainable, Short said. At some point you need to grow that top line.