Latest Batch of Earnings Will Test Economy's Strength

Wall Street
Richard Drew/AP

By Caroline Valetkevitch

A long hoped for improvement in the economy appears to be manifesting itself in second-quarter U.S. earnings, but the next two weeks could be the real test.

Companies such as General Electric (GE) and Intel (INTC) have reported solid results. In addition, GE believes now is a ripe moment to spin off its private label credit card division in the hopes growing consumer demand will make it more attractive.

Intel declared that personal computer sales have stabilized, while it forecast third-quarter revenue above Wall Street's expectations.

Profit growth for the second quarter is now estimated at 6.7 percent -- excluding results from Citigroup (C), which was hit by a big adjustment from a mortgage settlement -- better than where they stood at the end of June.

In addition, 68 percent of S&P 500 (^GSPC) companies so far are beating analysts' profit expectations, above the 63 percent long-term average, according to Thomson Reuters data. A similarly high percentage of companies are beating revenue forecasts.

"Analysts may be underestimating the level of prospective improvement in the second quarter," wrote Carmine Grigoli, chief investment strategist at Mizuho Securities in New York.

The latest profit estimate is up from a July 1 forecast of 6.2 percent, while revenue growth, now 3.2 percent, is on track to be the highest since the third quarter.

Still, it's easy to overestimate the excitement. Many of the early reporting is by financial companies, not always the best barometer of Main Street activity.

The next two weeks, however, will see 60 percent of the S&P 500 release their results. That is key for investors looking for confirmation the anticipated economic rebound from the first quarter is more than just weather related.

Among the companies set to release figures are Apple (AAPL), McDonald's (MCD), Coca-Cola (KO), and Caterpillar (CAT). So far in July, six of 10 S&P sectors -- particularly health care, consumer staples and energy -- have shown upward revisions from June, according to Citigroup.

%VIRTUAL-WSSCourseInline-1049%"The second quarter is going to be much stronger than the first for the reasons we all know, the weather. Investors are trying to decipher whether this improvement is a weather-related bounce or if there's actually internal growth happening," said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.

The U.S. economy contracted at a 2.9 percent annual pace in the January-March period, its worst performance in five years.

Recent jobs and other economic data suggest the economy was growing briskly heading into the second half, with growth forecasts for the second quarter now topping a 3 percent annual pace.

June's payrolls report showed a surge in job growth and the jobless rate closing in on a six-year low.
One promising sign for the second quarter: typically pessimistic analysts' forecasts, which most S&P 500 companies still tend to beat, declined just 2.2 percentage points between April 1 and July 1.

That is the smallest overall decline since the first quarter of 2011, Thomson Reuters data showed, and about half the average decline seen in the last five years.

Mike Jackson, founder of investment firm T3 Equity Labs in Denver, said his research shows eight out of the 10 S&P 500 sectors -- all but staples and utilities -- should post surprises this quarter.

"It probably suggests the earnings increases are occurring across a broader sector of the economy than what was previously believed," he said.

GE's quarterly report Friday showed the profit margin for its industrial businesses, a closely watched barometer by Wall Street, expanded 0.2 percentage point to 15.5 percent.

To be sure, not all reports are positive. Container Store Group (TCS) and Lumber Liquidators (LL) both warned about upcoming results, suggesting that retail weakness remains.

WSJ - 125th Wall Street
WSJ - 125th Wall Street