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With more companies issuing warnings about their results in recent weeks, investors may see more than a few disappointments in the second-quarter earnings season.
Companies faced many sources of pressure on their bottom lines over the last quarter, including persistent unemployment, the disruption of the global supply chain from the Japanese earthquake and tsunami, and high commodity and energy costs.
"This is where we can get down to the fundamentals of this market and finally see how companies are actually doing in this economy," Jack Ablin, chief investment officer at Harris Private Bank, told CNN Money.
Once-lofty expectations for the second quarter have been slipping for weeks. The Standard & Poor's 500 share-weighted earnings estimate has dropped four weeks in a row, from $232.5 billion on June 9 to $222.9 billion last week.
Of greater concern is that 84 companies – 17% of the S&P 500 – have given negative preannouncements, while just 33 have given positive preannouncements, according to Thomson Reuters data.
The resulting ratio – 2.6 – is more than twice that of the 1.2 ratio of last year's second quarter and a big jump from the 1.8 ratio of the first quarter.
The race to lower expectations has come primarily from the financial and consumer discretionary sectors.
In fact, Thomson Reuters expects financial sector profits in this earnings season to decline 26.4%, with modest declines expected in the utilities and telecommunications sectors.
Sectors predicted to do well include energy companies – which are expected see profits grow 31% — and materials industries such as aluminum and steel producers – which are expected to enjoy a 46% spurt in earnings.
Alcoa Kicks Off Earnings Season
But in an apparent glimpse of what to expect from this earnings season, Alcoa met expectations that had already been lowered twice.
Alcoa earned 32 cents a share, in line with expectations that were lowered from 35 cents a share in June and from 36 cents in May. Net income was 28 cents a share, more than double last year's 13 cents.
Alcoa's revenue rose from $136 million a year ago to $322 million. Higher prices for aluminum helped Alcoa overcome increasing costs for raw materials and energy.
Looking ahead, the company predicted aluminum demand would grow 12% this year and double by the end of the decade.
Alcoa expects demand from China's booming auto industry to slow in the short term due to lingering disruption from the Japanese disasters in March, but that Asian demand in general will accelerate in the years ahead as countries there build more office buildings, aircraft, autos and trains.
Reflecting on the anemic housing markets in both the United States and Europe, Alcoa Chief Executive Klaus Kleinfeld said construction is "pretty much dead" with no improvement in sight.
On the other hand, Alcoa enjoyed double-digit increases in packaging, auto, aerospace and automotive sales.
Kleinfeld described the U.S. economic recovery as "uneven."
Indeed, analysts are puzzling over just how much of an impact the wavering recovery will have on earnings this quarter as well as for the rest of the year. Some analysts expect companies to continue lowering guidance as 2011 progresses.
The long-fruitful strategy of sustaining profits by continuing to trim costs and increase efficiency may finally have run its course.
"Cutting costs has been the name of the game for corporations, but the reason why there might be some caution going into this earnings season is there's a sense that companies have cut all that they can cut," James Paulsen of Wells Capital Management told The Business Times.
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- Bloomberg BusinessWeek:
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Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.