If you’re uneasy about your stock investments, here’s encouraging news: The next round of earnings reports is ready to roll. For the rest of July and through most of August, thousands of U.S. companies will reveal how they’re doing and what they expect over the balance of the year. Those reports will provide a view from the trenches about the shape of the U.S. economy and a recovery that appears to be flagging and that millions of American believe is nonexistent.
But unlike employment, earnings are a bright spot in the economic picture. The quarterly profit trend has been bullish since mid 2009. Partly, that’s because earnings were so depressed during the Great Recession and it was easy for companies to show terrific quarter-over-quarter comparisons. But that game is starting to end. According to analysts tracked by Thomson Reuters, second-quarter earnings for companies in Standard & Poor’s 500-stock index should come in, on average, about 10% higher than year-earlier profits.
There’s another side to earnings season beyond the numbers. It’s an excuse for investors to look away from Washington’s budget and debt-limit shenanigans, Europe’s fiscal troubles and the dreadful jobs news. In recent quarters, the pattern has been for unexpectedly strong earnings reports to overpower other news. And earnings this quarter may turn out to be better than expected -- perhaps on the order of 12% to 15% above the previous year’s figures. That’s because the latest numbers are being compared with results in the second quarter of 2010, a quarter when gross domestic product grew 1.7%, the slowest quarterly growth since the end of the recession.
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In the previous five quarters, 68% to 78% of the S&P 500 surpassed analysts’ earnings targets (the long-term average for what Wall Street calls “beats” is 67%). Bosses are known to talk down the true health of their businesses so that analysts don’t forecast such lofty profit gains that the company will be hard-pressed to meet estimates. That’s because when companies fail to meet expectations, their stocks usually get hammered.
Traders don’t only sell, though. They buy on positive bottom-line numbers even before patient investors bother to check whether a beat derives from honest business trends and not a one-time windfall, such as the sale of a property, a huge tax refund or proceeds from the settlement of a lawsuit .
Here is my list of critical earnings reports to watch (SEE OUR SLIDE SHOW. I’ve amended the list to include more representation from technology and heavy industry because investors are hungry for evidence that the broad economy isn’t backsliding (see my list from last year).
You definitely should not miss General Motors’ report on August 4. In May, GM issued its first full-quarter earnings release as a reorganized company and beat forecasts handily. GM said at the time that it expects no adverse impact from the Japanese earthquake and tsunami disaster. Could GM actually benefit from Japan’s plight? Strong domestic sales would also say that Americans aren’t afraid to buy cars and trucks because they aren’t afraid of losing their jobs. (Share prices are as of the July 14 close.)
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