Investors already disheartened about the growing problems of the financial sector and the soaring price of oil are facing more depressing...
NEW YORK — Investors already disheartened about the growing problems of the financial sector and the soaring price of oil are facing more depressing news with the release of second-quarter earnings reports.
The coming week will bring the first big wave of results from America’s largest companies, including seven Dow Jones industrial-average components and 53 members of the Standard & Poor’s 500 index.
Investors shouldn’t expect much: Earnings for all the companies in the S&P 500 index are forecast by the rating agency to be down 10 percent from a year earlier.
Thomson Financial, which compiles forecasts from analysts at banks and brokerages, estimates the decline at 13.5 percent. Either way, Wall Street is well past the nearly five years of double-digit growth that ended as the subprime-mortgage crisis spilled into the credit markets last summer.
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The credit crisis is responsible for the earnings plight; financial companies that have written down an aggregate of $300 billion in soured mortage-related assets remain the biggest drag on S&P 500 earnings. Results are expected this coming week from Merrill Lynch, JPMorgan Chase and Citigroup.
But profits and outlooks for the future are expected to be sobering for U.S. companies as a whole.
“The feeling is that this will be a sloppy earnings season, the tone of which is going to be very much like the previous three quarters,” said Phil Orlando, chief equity-market strategist at Federated Investors. “The banks and the housing sector, on through autos and retailers, are the problem children.”
Financial company earnings are forecast to fall by 69 percent year-over-year, according to Thomson. Meanwhile, consumer discretionary companies — which includes auto manufacturers and home builders — are expected to see their profits fall by 19 percent.
There are some bright points, with energy companies expected to turn soaring oil prices into a 28 percent jump in profits. Crude oil is up nearly 50 percent this year, and hit a record on Friday over $147 a barrel.
With both oil and financial earnings certainly at extremes, analysts like Orlando find it useful to strip out their performance to get a better idea of how the broader market performed.
If you remove the financials, Thomson forecasts the companies in the index would post an average earnings-growth rate of about 9 percent; and if you remove financials and oil, the rest of the S&P 500 would have a 4 percent profit growth rate.
“There’s some growth there, but nothing like we’ve seen in past years,” said John Butters, director of U.S. earnings research for Thomson Financial. “You also have to take into consideration that the forecasts have come down during the quarter.”
He said that at the start of the quarter, analysts expected the financial sector to tumble 31 percent year-over-year. The barrage of bad news during the quarter forced analysts’ to rethink their forecasts, causing both expectations and stock prices to fall.
And amid this uncertainty, analysts don’t expect companies to be very optimistic about the future. By most accounts, lackluster second-quarter results are already factored into stock prices. That makes it even more important for corporate executives to manage expectations going forward.
“Any guidance that management provides, from a self-serving standpoint, will be downbeat and cautious,” Orlando said.
“They will try to set the bar as low as possible to engineer an upside surprise in the third quarter.”