(July 5) – “The red flag is up this earnings season,” writes Karen Jacobs in today’s Wall Street Journal.
“While second-quarter earnings are largely expected to be strong, analysts and economists see signs that suggest corporate-profit growth will ease in the coming quarters, as higher costs on various fronts put the brakes on economic growth.”
“‘One of the reasons profits have been strong is because the economy has been strong,’ says Nancy Lazar, an economist at ISI Group in New York. Now, she says, slower growth due to the Federal Reserve Board’s yearlong crusade to boost interest rates is beginning to pressure a few bellwether sectors. She says central banks around the world have tightened credit, and it ‘looks like we’ll have a global slowdown,’ which would hurt U.S. companies.”
“Signs of slower economic growth have already become evident in second-quarter profit warnings, particularly among firms in rate-sensitive sectors such as housing, banking and retailing. Consumers, their psyches perhaps unnerved by historically high gasoline prices and the rising cost of credit, are putting off purchases of big-ticket items such as cars, and are becoming pickier when buying smaller items such as clothing.”
“Blue-chip companies Honeywell International Inc. and Procter & Gamble Co., for instance, have lowered their second-quarter profit forecasts, blaming everything from high oil prices to a weak euro. Companies in other industries have indicated that rising costs of labor and other raw materials will hurt earnings.”
“But while profits may be lower than had been previously expected, they are still expected to fare well. “Second-quarter earnings are going to be terrific,” says Chuck Hill, director of research at First Call/Thomson Financial in Boston, a firm that tracks earnings estimates from securities analysts on Wall Street.”
“First Call says it expects companies in the Standard & Poor’s 500-stock index to report higher third- and fourth-quarter earnings vs. a year earlier, but sees the size of the increases falling each quarter. For example, the firm expects year-over-year profit growth of 18.5% and 16.8% for the third and fourth period, respectively, compared with 23.6% for the first quarter and expected second-quarter growth of 19.2%. Most of the nation’s largest companies will begin reporting second-quarter results two weeks from now.”
“First Call says that 57% of the earnings pre-announcements tracked so far for the second quarter reflect lowered expectations, up from 44% in the first quarter and ahead of the year-earlier’s 56%. Mr. Hill says that the second-quarter pre-announcements don’t seem worse than normal, but that more companies will probably revise their outlooks downward before announcing second-period earnings.”