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Why gloomy 2Q earnings outlook might not be so dim

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NEW YORK – For Corporate America, it’s the season of low expectations.

Companies have been scaling back their earnings forecasts for weeks as part of a quarterly cat-and-mouse game with financial analysts. It’s not OK just to report a strong second-quarter profit – they also need to beat analysts’ forecasts. And companies are eager to do just that.

Wall Street analysts now predict that earnings for companies in the Standard & Poor’s 500 rose 3 percent in the second quarter compared with a year earlier, according to a survey by S&P Capital IQ. But as recently as April 1, they thought earnings would rise nearly 7 percent. At the start of the year; they forecast a 9 percent increase. Companies that provide raw materials and technology firms are expected to drag down growth.

Another reason for the drop? Eighty seven of the 111 S&P 500 companies that offered guidance were negative.

“You really have to take it with a grain of salt,” said Christine Short, associate director at S&P Capital IQ. Last quarter, she said, 65 percent of companies beat financial analysts’ estimates.

Quarterly growth over the past 15 years has averaged 8 percent. In the last eight quarters, analysts’ estimates have underplayed growth by about 4 percentage points, according to Short. That would mean earnings in the second quarter just ended are more likely to rise around 7 percent.

There are plenty of areas that could help lift corporate profits. Americans’ confidence is up and they are willing to spend again. The housing market rebound is also expected to push up earnings of home construction companies such as DR Horton Inc., Lennar Corp. and PulteGroup Inc. The consumer discretionary sector, which includes retailers like Target Corp., entertainment companies like Walt Disney Co. and the homebuilders, is expected to see growth of 12 percent.

The financial sector is also expected to see a jump, with 16 percent growth from a year earlier.

An aggregate of the S&P 500’s earnings per share is estimated at $26.41, up from $25.67 reported in the second quarter last year. That would be the second-highest quarterly earnings, only topped by the all-time high of $26.71 during this year’s first quarter.

Howard Silverblatt, a senior index analyst with S&P Dow Jones Indices, said the earnings should propel the S&P 500 index past its record close of 1,669.16 on May 21.

“The guidance has been negative, but not as much as historically,” Silverblatt said.

Still, there are concerns. Short points out that earnings are only part of the picture. She’s scrutinizing revenue growth, which is predicted to slow by 0.3 percent from last year’s second quarter. If that holds true, it would be the first revenue slowdown since the third quarter of 2009, just after the recession ended

“Companies have gotten very good at managing costs – which is of course important – but it’s unsustainable,” Short said. “At some point you need to grow that top line.”

Profits at mining and other companies that provide gold, aluminum and similar products are expected to slow because of lower commodity prices. Growth for their profits is expected to pull back by 4 percent.

The technology sector isn’t looking promising either. Personal computer sales have slumped, hurting Dell Inc. and Hewlett-Packard Co. But the real drag is Apple Inc. The company isn’t launching any new products and is expected to earn $7.37 a share, down from $9.32 last year, according to FactSet. Apple accounts for about 15 percent of the sector’s weight, so its earnings drop brings down the entire group. Growth in IT earnings will slow by 5 percent.

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