Investors are bracing for another weak earnings season, putting their hopes in a brighter corporate profit picture in the second half of the year.
As usual, Alcoa Inc. is set to kick off the main block of U.S. releases after the market closes on Monday. It will be followed by most of the U.S. corporate world – at least those who have standard earnings calendars – over the coming weeks.
Analysts are downbeat on their expectations, mainly because there has been an extraordinary amount of negative "guidance" issued by the companies themselves.
Indeed, more than 85 companies in the S&P 500 Index have said their numbers for the second quarter will be weaker than expected, quadruple the number that have given positive guidance. While companies have fallen into a pattern of issuing generally dismal predictions, then beating those expectations, that level of negative guidance is at a record high level.
Consequently, "it's likely going to be another weak quarter in terms of growth," said John Butters, senior earnings analyst at FactSet Research Systems Inc., an independent market analysis firm. He said the broad consensus is that overall earnings will rise by less than 1 per cent in the quarter, an estimate that has deteriorated over the past few months.
The worst performance will likely be from companies in the materials, metals and mining sectors, which have all been hit by declining commodity prices. But there has also been a lot of bad news from the technology and the industrial sectors, Mr. Butters said.
Still, the overall picture is not as bad as it could be, he said, because the financial sector is expected to post solid numbers in the second quarter. Investment banks and brokerages, such as Morgan Stanley and Goldman Sachs Group Inc., are expected to do well, as are the large diversified financial companies such as Citigroup Inc. and Bank of America.
And in the remaining half of 2013, the overall profit picture should be much better, thanks to the improvements that are showing up in the U.S. economy – particularly in the housing and automotive markets. "This good economic data is not hitting yet," Mr. Butters said, "but there is an expectation that earnings are going to pick up in the second half of the year and into 2014."
He did issue a note of caution for the balance of the year. If companies' earnings guidance – or even the tone of their projections for the rest of the year – starts to turn negative in any way, investors who are expecting an improvement may shift quickly into a mood to sell.
Stéfane Marion, chief economist and strategist at National Bank Financial, agrees that any significant improvement in the U.S. profit picture will have to wait until the third and fourth quarters of 2013. But then, the good news could be significant. "The consensus is betting on a very sharp rebound in the second half of this year," he said.
As for the profit picture among Canada's biggest corporations, it will correlate very closely with specific commodity markets, Mr. Marion said.
With gold and base metal prices depressed, companies in those businesses will likely have a poor showing in the second quarter. But a strong rebound in oil prices will help that part of the resource sector, and the slump in the Canadian dollar may give a boost to companies with a strong export profile – in both energy and manufacturing markets.
One factor that analysts on both sides of the border will be analyzing closely in the second-quarter numbers is the degree to which companies' top lines – their sales – are expanding.
Revenue growth has been pretty much absent in the past few quarters, said Christine Short, associate director at S&P Capital IQ, and it is expected to turn negative in the second quarter.
In some ways, revenue paints a more accurate picture of the health of a corporation than the earnings number, Ms. Short said. Companies can prop up profits by managing their costs and making creative use of accounting measures, "but ultimately they can't really fake that top-line number."