The second quarter earnings season kicked off on Monday, with the results from the Pittsburgh-based aluminum giant Alcoa, traditionally the first American company to issue an earnings report each quarter. Alcoa is often seen as a bellwether for the rest of the American market, and if that’s the case this time around, we could be in for a pretty unexciting earnings season.
The Wall Street analysts had issued a consensus estimate that Alcoa would report earnings of 5 cents per share. Alcoa came out on Monday reporting that it had actually earned 6 cents per share. In other words, it beat the Street by a margin of a whole penny.
If that sounds like a whole lot of nothing, there could be much more on the way. Stock researcher Ed Yardeni has been compiling earnings estimates from the S&P 500 over the past two months, from April 5 through July 5, and he’s found that the consensus estimate dropped by 3.3 percent over that period.
In a way, that’s not a surprise; the past three months have hardly been robust ones for the American economy. And the financial sector has led the way downward. According to Yardeni’s figures, the consensus earnings estimate for financials has dropped by 7.7 percent, in the wake of the Barclays/Libor scandal and reports that JPMorgan Chase may have lost as much as $9 billion in its bad derivatives bet earlier in the year. That would wipe out its entire first quarter profit of $5.4 billion — and more.
But what’s striking about Yardeni’s figures is how broad-based they are. He sorted earnings estimates into ten sectors, and found that for nine of them the average estimate had been lowered. The financial sector was the worst, but everything from materials — down 4.5 percent — to industrials — down 0.7 percent — has been busy lowering expectations as well. The only sector that raised earnings expectations over that time frame has been telecom services, which is up 3.3 percent.
There are other dark clouds on the horizon as well. According to the analysts surveyed by Bloomberg News, corporate profits are expected to fall by 1.8 percent in the second quarter. We haven’t seen an outright decline in corporate profits since 2009. Just among the companies in the S&P 500, the predictions are even worse: Second quarter earnings growth was pegged at a negative 2.1 percent by S&P Capital IQ. That too would be the worst growth rate since the second quarter of 2009.
Among the individual sectors, S&P Capital IQ reported that seven of the ten sectors are expected to show negative earnings growth for this quarter. On the brighter side, they estimate growth for the industrials sector at 8.8 percent, the information technology sector at 4.8 percent and the consumer staples sector at 1.3 percent.
Other than that, it’s all downhill. The worst of the bunch is the materials sector, projected to drop its earnings by 12.3 percent. Even the much-beleaguered financial sector, expected to lower earnings by 7.8 percent, isn’t far from the middle of the pack by this measure.
But of course, all this lowering of expectations is to be expected as part of the earnings game. Corporations know they will get hammered if they fail to meet the analysts’ estimate, so they try very hard to put softer numbers out there, numbers that they can more easily surpass.