The storyline became as predictable as a soap opera’s. But when the latest round of corporate earnings starts rolling in this week, look for a twist: Profits are expected to fall.
“China is still slowing. Manufacturing numbers in the U.S. are weak,” says Christine Short, senior manager at Standard & Poor’s Global Markets Intelligence. “You can only have so many things working against you.”
Stock analysts expect earnings for companies in the Standard & Poor’s 500 index to decline 1 percent for April through June compared with the year before, according to S&P Capital IQ, the research arm of S&P.
That would break a streak of 10 quarters of gains that started in the final quarter of 2009.
Over recent weeks, a motley collection of chain stores, steel producers and technology titans have warned of slowing profits. They all point to similar culprits – flagging sales to Europe and slower economic growth in China.
Europe’s debt crisis has been a problem for nearly three years, but that never stopped companies from reporting record profits quarter after quarter. The U.S. economy appears to be losing speed, but the economic recovery has moved at a fitful pace since the Great Recession ended in 2009.
To be sure, companies sometimes cut their profit expectations too deeply, a practice that provokes grousing among many investors. They suspect companies of setting the bar so low that they’ll soar over it and get rewarded with a roar of applause and a higher stock price.
In early April, companies had talked down their forecasts so much that analysts expected first-quarter earnings to be down 0.1 percent for the S&P 500. A couple of months later, the final figures looked starkly different: Earnings rose 7.5 percent.
That history is one reason many analysts and investors say they believe this earnings season won’t be quite as bad as current forecasts. Not as bad, of course, isn’t the same as good.
“Could they beat it? Sure,” says Bill Stone, chief investment strategist at PNC’s asset management group. “They’ll probably jump over the bar. But they’re not going to set the world record for the high jump.”
