I've been speaking quite a while about the difficult this earnings period could be. I've actually been more concerned about future guidance – Q3 and Q4 seem wildly optimistic in the context of a global slowdown, but as we get closer to the actual reporting period I've become concerned with the Q2 data as well. We've already had a flurry of high profile warnings and with both an European and Chinese slowdown, a lot of the multinational revenue growth could be in question. The stronger dollar also does not help these firms.
But the stock market is all about expectations. Many times we see a company lowball guidance or reduce expectations over the course of a quarter only to "beat" them on the day of earnings and see the stock surge. That's just part and parcel with the Wall Street game. And I'm starting to see a lot of stories in the past 2 weeks about the potential for a bad earnings season. So has this become "baked in" at the macro level? That could be the main question to answer over the next 4 weeks.
Story 1: Reuters - Investors Brace for Shaky U.S. Earnings Season
Earnings season begins on Monday with U.S. companies facing a litany of issues that could make second-quarter reports look dismal.
Corporate outlooks are at their most negative in nearly four years and companies that have already reported have shown lackluster growth. Nearly two dozen S&P firms have already cited Europe's woes – which seem to be worsening – as a concern.
In addition, more than 85 members of the Standard & Poor's 500 lowered expectations in the last several weeks and the quarter's expected earnings growth of 5.8 percent is entirely due to Apple Inc and a big earnings gain for Bank of America Corp due to a mortgage settlement last year.
Earnings growth is estimated to decline 0.4 percent without the benefit of Apple and Bank of America.
Revenue is seen up just 1.7 percent, down from 5 percent growth in the first quarter, the data showed.
Corporate outlooks are the most negative they've been in years. Negative-to-positive earnings guidance is now at 3.3 to 1, the worst since the fourth quarter of 2008.
Story 2: AP – Get Ready for the End of Record Corporate Profits
For almost three years, no matter what has rattled the financial markets — a debt crisis in Europe, high gasoline prices, a slower economy — investors have been soothed by rising corporate profits.
The storyline became as predictable as a soap opera's. But when the latest round of corporate earnings starts rolling in this week, look for a twist: Profits are expected to fall.
Stock analysts expect earnings for companies in the Standard & Poor’s 500 index to decline 1 percent for April through June compared with the year before, according to S&P Capital IQ, the research arm of S&P.
That would break a streak of 10 quarters of gains that started in the final quarter of 2009.
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund's holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog