Friday, July 9, 2010

Bulls Sniff Around for Reason to Get Excited


Should second-quarter earnings season prove to be good, bulls may be running in more than the streets of Pamplona.

The earnings rush is unleashed next week, with Alcoa first out of the gate on Monday. By week's end, nearly two dozen S&P 500 companies including Intel, Bank of America and General Electric will offer a sense of whether the stock market's recent decline—its worst quarterly drop in nearly two years—overstates economic weakness. What will make for a good earnings season?

Second-quarter profit is expected to rise by an impressive 27% from a year ago, according to Thomson Reuters. But that alone mightn't offer much comfort since earnings were still very weak during the same period last year. Rather, it is likely to take solid revenue growth and, in particular, steadfast guidance for the market to shake off lingering double-dip fears.

Companies that hit earnings targets but miss on revenue aren't likely to please. With costs already cut to the bone, sales growth is critical for firms to boost earnings going forward. And analysts have become more cautious on the outlook for revenue growth over the past month, particularly in sectors such as consumer discretionary, which relies on nonessential household spending. For now, the S&P 500 is expected to post 9% revenue growth year-on-year, after 11.2% in the first quarter.

Alcoa will start a deluge of earnings news next week. Above, traders work on the floor of the New York Stock Exchange on Thursday.

Another factor to watch will be the relative performance of different sectors. Weak performance in sectors such as retail is somewhat expected at this point in the economic cycle. It has had a strong initial rebound and still suffers from a continued overhang of consumers shedding debt. Signs of weakness in stalwarts like industrials and technology would be more troubling.

Ultimately, though, it is what companies say—or don't say—about second-half prospects that will likely decide whether markets get gored again or recover. While many economists have recently marked down growth estimates through 2011, analysts nevertheless expect record-high 2010 earnings per share of about $96 for the S&P 500. That is likely to hold unless companies start singing a different tune, says Barclays Capital equity strategist Barry Knapp. If they remain even cautiously upbeat, he says, "It probably means we rally." For now, saying things aren't getting worse may be good enough.

Write to Kelly Evans at

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