Wall Street will watch second quarter earnings for telltale signs that the economy has slowed, or that revenue growth or margins have been compressed because of high commodities prices, or expenses which were added early in the year because a recovery had apparently begun.
Companies which warn that negative factors over the rest of the year will soften earnings will turn, in many cases, to layoffs. These won't be as severe as the ones three years ago, when the Great Recession sent many companies' bottom lines into loss territory. However, with the growth of U.S. employment stalled -- based on the June jobs report and high weekly jobless claims -- America's companies have probably already started to modify any plans they might have had to add employees.
Cisco (CSCO) could cut as many as 10,000 jobs next month according to several media reports. That news is just the tip of the iceberg.
Delta (DAL) recently said it would take a second quarter charge for job cuts. Fuel costs were one reason, and while those have moderated, the decrease has not driven prices down to the levels of a year and a half ago. The entire airline industry faces a drop in passenger travel as the economy falters, and margins which will stay tight as long as crude is above $90. American Airlines (AMR) stock has been battered by investors because of balance sheet concerns and worries that it is the only large U.S. carrier which has not engineered a merger to cut costs. AMR shares hit a 52-week low recently of $5.25.
The retail sector is also under pressure because of high costs for key commodities like cotton. Several smaller retail firms like American Apparel (APP) are under financial pressure because same-store sales have been challenged this year. Coldwater Creek (CWTR) and Talbots (TLB) have also been identified as firms in deep trouble with the start of the holiday season only three months away.
The industry that may have recovered the most from the downturn and now is in trouble again is banking. "Faced with weak markets and uncertainty over regulations, many of the biggest firms are preparing for deep cuts in jobs and other costs," The New York Times recently reported. Even profitable investment bank Goldman Sachs (GS) may lay off 10% of its staff.
Earnings season a year ago gave the markets hope that the rounds and rounds of layoffs that had become a hallmark of the economy were largely over. That no longer appears to be the case.