The earnings conundrum

That increasingly familiar question will be raised again over the next few weeks as big US companies report on their business performances during the second quarter of the year, a period when the overall economy clearly struggled and the pace of hiring slowed to a crawl.

The rate of corporate earnings growth is expected to moderate compared to past quarters but still show gains well beyond what the economy would seem to support. The biggest companies that make up the Standard & Poor’s 500 stock index are forecast to report earnings about 7 percent higher than profits from the same period last year.

That sounds impressive - and it is - but the story behind resilient corporate profit growth isn’t uniformly upbeat. In fact, a closer look at S&P 500 earnings by 10 different industry groups shows just how lumpy the results are expected to be.

Earnings are forecast to be lower in three of those 10 sectors and much worse in the weakest industry group of all, according to data tracked by Thomson Reuters. Modest earnings declines are anticipated for utilities and telecommunications services companies. Profits by banks and other financial service providers are expected to sink 26.4 percent.

Earnings among companies in the seven other industry groups are forecast to rise, but a large part of those gains is highly concentrated among just a few. Companies in materials industries, such as aluminum and steel producers, are expected to post profit increases of 46 percent. Energy company earnings are forecast to grow 31 percent.

Alcoa Inc., the nation’s largest aluminum producer, kicked off quarterly earnings season in earnest yesterday when it reported profits that had more than doubled compared with year-ago results. Big banks will dominate the earnings headlines over the next week or so, and a wave of technology companies is scheduled to follow them.

By the time it’s all over, the basic question about relatively strong corporate profits amid a very weak economy recovery will still deserve an answer.

For more than a year, the general explanation for strong business earnings was all about efficiency. Companies had cut overhead to the bone and any increase in the business, however slight, fell right to the bottom line. Other industries that built technology used by corporate customers to become even more efficient were among the best performers.

But efficiency has its limits, and surely we must be approaching them by now. The current explanation to the disconnect between profits and the economy has more to do with energy.

The rising cost of energy in general, and oil in particular, was the biggest factor slowing the economy this second quarter. We can worry about the federal debt ceiling and wring our hands about the European credit crisis. But prices at the pump did more than any other single factor to stall the economy.

Energy prices infiltrate every part of an economy, including individual companies. Some actually benefit from higher energy prices. Most suffer eventually but not necessarily right away. More expensive energy helped slow the growth in corporate profits during the second quarter and may have a bigger impact over time, even though oil prices have since fallen from their peak.

“Energy has both positive and negative effects,’’ says Lew Piantedosi, an equity portfolio manager at Eaton Vance in Boston. “It’s a huge cost for many companies, but you have to take it on a case by case basis.’’

One other factor helping big companies post strong earnings: A weak dollar. Companies that make up the S&P 500 ring up about half their sales overseas. A declining dollar makes their products more competitive in strong emerging market economies globally.

So why are stocks so cheap if earnings remain so strong? The S&P 500 shares trade at about 13 times expected 2011 profits, lower than the average historical ratio of stock prices to earnings. An era of ultra-low interest rates should favor above average stock prices.

The answer comes down to a lack of confidence about the future beyond this quarter and, for that matter, this year.

Stock investors need the economy to stage a more robust recovery sooner or later or earnings will finally start to sag. That disconnect between the economy and profits can’t and won’t continue forever.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.