Analysts forecast S&P 500 profits up 13%, led by resource stocks
By Sara Sjølin, MarketWatch
NEW YORK (MarketWatch) — Earnings growth cooled in the second quarter as companies struggled with disruptions from Japan’s earthquake and higher costs, according to analysts polled ahead of Monday’s unofficial start to the reporting season.
But the outlook isn’t all grim: About the same number of companies have lowered their forecasts compared to the last quarter.
The Week Ahead: Google, Citigroup
Earnings from Alcoa, Google, Citigroup and JP Morgan are likely to set the tone for investors next week.
Analysts surveyed by FactSet Research expect earnings for companies in the S&P 500 Index SPX -0.70% increased 12.7% in the second quarter from the same quarter a year ago. That’s down from 19% year-over-year earnings growth in the first quarter, and reflects some recent downgrading of expectations. Two weeks ago, the outlook was for a 14.2% growth rate.
“The economy has been going through a soft patch in the second quarter and it’s a more challenging economy for companies,” said James Paulsen, chief investment strategist at Wells Capital Management.
On a brighter note, companies have largely stuck by their forecasts. Companies lowering their forecasts have numbered 66, the same as in the first quarter. Slightly fewer companies have raised their outlook -- 34 versus 41 in the first quarter.
Several factors are weighing on second-quarter earnings growth, Paulsen said. Higher mortgage rates, which cut into consumer spending; a rise in commodity prices; bad weather; and the aftermath from the Japanese earthquake in March all contributed to a more difficult business climate.
“Some of it happened in the first quarter, but it’s a lagging effect and the real impact is in the second quarter,” Paulsen said.
Across almost all sectors, earnings growth is expected to slow compared to the first quarter, with information technology and industrials results expected to make the sharpest slowdown.
The materials and energy sectors are expected to post the steepest growth rates, just as they did in the first quarter. Profits from materials-sector companies, which include miners and chemical firms, are expected to expand 48.2%.
Aluminum producer Alcoa, Inc., AA -0.67% whose late Monday earnings will act as a symbolic start to the second-quarter earnings season, is expected to report earnings surged from the year-ago quarter. Read more on what’s expected for Alcoa.
Energy earnings should rise 35.2%. Both energy and materials-sector forecasts are slightly slower than first-quarter growth rates.
Fatter profits at resource firms shouldn’t be surprising given the performance of many commodities in the past year.
Crude oil prices ended the second quarter around $95 a barrel, up from $75 a barrel the same time last year. Gold prices were up almost $260 to $1,503 an ounce.
“The sectors have gained momentum with the higher commodity prices,” he said. “But we’ll see a rollover in commodity prices that will slow the sectors down in second half of the year.”
Utilities, consumer staples and telecommunication services are expected to show the worst performance. Utilities earnings likely slipped 0.9%, according to FactSet, while consumer staples and telecoms earnings should have risen 5.2%.
In the past few weeks, a more pessimistic view of financial earnings -- particularly for index heavyweight Bank of America Corp. BAC -2.01% -- has weighed on earnings forecasts.
Financial earnings are expected to expand 10.9% in the second quarter. That’s a sharp drop from expectations of around 23%, based on a FactSet analyst survey at the end of March.
In fact, the main reason for the drop in expectations for the entire S&P 500 over the past two weeks is Bank of America Corp.’s BAC -2.01% expected results, FactSet said in a note Friday.
The bank has experienced the largest dollar-level decline in share-weighted earnings of any company in the index. Without Bank of America, S&P 500 earnings are expected to rise 13.8%, says FactSet.
Earnings are likely to dominate headlines in the weeks ahead. Along with Alcoa, Google, Inc. GOOG -2.67% , Citigroup, Inc. C -1.41% and J.P. Morgan Chase & Co. JPM -1.40% report results next week.
Even so, the quarterly earnings season will not be watched as closely by investors as in previous periods, Paulsen from Wells Capital Management, said.
“We’re at a critical turning point in the recovery cycle, so investors pay more attention to weekly numbers than earnings reports,” he said.
Sara Sjølin is a MarketWatch reporter, based in New York.
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