Weak Outlooks Ahead, Even If Second-Quarter Results Are Strong

Second-quarter earnings reports start in July. Investors hoping to turn the page on a lackluster first half of the year were greeted with a slew of downbeat economic data on Thursday. But more turbulence could lie ahead as companies prepare to report second-quarter earnings starting in a few days, even if results over the last three months come in relatively strong.

Wall Street analysts have now baked in heady growth expectations for companies. And lackluster guidance for the year ahead could sink stocks even if recent performance comes in strong.

Earnings Growth Forecast

Earnings for the benchmark S&P 500 index companies are forecast to grow 18% year over year to $23.17, from $19.61 in the quarter just ended. In the third quarter of 2011, meanwhile, analysts are now forecasting a new record high of $24.28.

The prior high of $24.06 occurred during the second quarter of 2007, at the height of the last credit-fueled binge.

A relatively strong bounce back from depressed conditions -- the recession ended last summer by most accounts, making earnings gains comparatively easier to notch up -- may have helped embolden analysts. Companies in the S&P 500 earned a paltry $13.81 a share during the second quarter of 2009.

But expectations may now be too lofty. (For more, see video.)

Optimistic Outlook?

The growth outlook "assumes that everything falls into place," said Howard Silverblatt, senior index analyst at S&P. "I'd love to be able to say that stocks were obviously a bargain now, but the outlook is also very optimistic."

Indeed, a slew of big-name companies that surprised the markets with weak outlooks in June saw their stocks hit in the process. An environment where a growing number of companies are issuing weak guidance, meanwhile, provides other companies with cover. Management can blame the environment rather than their own performance and take the opportunity to set the bar lower for the future.

The prospect of surging earnings despite a weak economic recovery, though, has been one of the things propping the stock market up. And if more companies say that the future won't be as rosy as Wall Street had forecast -- even if recent performance was good -- investors should expect the selling pressure to mount.
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