Earnings Season Raises Hopes and Fears

07/09/2010 2:12 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Today is the calm before the earnings storm.

Earnings season starts on Monday, July 12, when Alcoa (NYSE: AA) reports second quarter earnings.

And then we’re off to the races, with Intel (Nasdaq: INTC) reporting on July 13, Google (Nasdaq: GOOG) on July 15, and three big banks—JPMorgan Chase (NYSE: JPM), Bank of America (NYSE: BAC), and Citigroup (NYSE: C)—reporting before the market opens on either July 15 or July 16.

This is one of those quarters when Wall Street will not look so much at what numbers companies deliver for the second quarter that ended—for most companies—on June 30, but instead will be listening to what companies say about the third quarter that ends on September 30.

Analysts are projecting that earnings of the companies in the Standard & Poor’s 500 index will climb 34% in the second quarter from the second quarter of 2009.

But it’s the third quarter and what comes after that has Wall Street worried. The decline in stock prices from the April 23 high has been driven by worries that the pace of US economic growth will slow in the second half of 2010. And so, Wall Street will want to find out if companies have any better idea of what’s going to happen in the second half of 2010 than analysts do. (For more on what’s got Wall Street worried and when, see this post.)

I flagged the grounds for this worry back in February.

At that time, analyst projections called for S&P operating earnings to grow by 69% in the first quarter of 2010 from the first quarter of 2009, while they pegged second quarter growth at 43%. Third quarter earnings growth was estimated then at 26%.

“See the pattern here?” I wrote. “As stocks move further from the economic bottom in earnings at the end of 2008, year-to-year earnings growth will slow, because the year-earlier quarter wasn't quite so horrible. That makes spectacular earnings growth pretty easy to come by in the first half of 2010 and makes earnings growth in the second half of the year look increasingly ordinary (especially if stocks have kept moving up in price quarter by quarter).”

“So, the odds that stocks will deliver the earnings needed to justify higher share prices look pretty good in the first half of 2010 and then decline as the second half progresses.”

And this was before Wall Street started to worry about slowing economic growth in Europe, the United States, and China.

So, you can bet that Wall Street is going into this earnings season with its heart in its mouth.

Expect volatility as the market acts on its fears by selling off shares of companies that issue warnings about growth in the second half of the year. Expect major earnings revisions as analysts react to earnings warnings by cutting the heart out of their earnings estimates for any company that disappoints. After raising estimates for 2010 earnings for most of April and May, analysts have started to pull in their projections in the last week or so.

I don’t see a lot of upside, even for companies that deliver both good second quarter earnings and good second half guidance. To me, this looks like a “sell on the good news” quarter for much of Wall Street.

Full disclosure: I don’t own shares of any company mentioned in this post.

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