U.S. 2nd-quarter profits seen surprising to upside
NEW YORK (Reuters) - Profits from U.S. companies are likely to surprise to the upside in the coming weeks as economic growth has proven stronger than expected.
Signs of a strong job market have helped fuel optimism about the second-quarter reporting period, which begins in earnest next week, even as the pace of economic growth has raised concerns about higher interest rates, according to analysts.
On Friday, the Labor Department reported U.S. employers added 132,000 jobs in June and that payrolls rose more than previously thought in April and May. Wages also increased.
"Economic growth has picked up during the second quarter, and that appears to be continuing going into the third quarter," said Fred Dickson, market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon.
"Companies were very aggressive trying to talk down earnings estimates in the first-quarter earnings season, and we're probably going to see the normal number of positive surprises."
What that means is earnings should provide a "modest lift" to the stock market during July, he said. The three major indexes put in a weak performance for the month of June, with the Standard & Poor's 500 index <.SPX> declining 1.8 percent.
Of the 31 S&P companies that have reported results so far for the second quarter, about 68 percent have beaten forecasts, according to Reuters Estimates data.
On Monday, Alcoa Inc. <AA.N>, the world's largest aluminum company, reports results, marking the start of the heaviest part of the reporting period.
Bear Stearns on Friday lowered its earnings-per-share forecast on Alcoa to 78 cents from 85 cents after a power outage caused a production setback at the company
The week ends with General Electric Co. <GE.N> results on Friday, which will be watched for the company's comments on the economic outlook as well as its quarterly figures.
For all Standard & Poor's 500 companies, second-quarter earnings are expected to rise 5.3 percent versus a year ago, S&P said.
That's down from growth of 7.9 percent in the first quarter, and well below the double-digit gains of recent years, a slowdown that analysts have long predicted amid increased signs of housing market weakness.
"We've had less pre-earnings disappointments than in the past, so that's usually a good sign," said Alan Lancz, president of Alan B. Lancz & Associates Inc. of Toledo, Ohio.
However, he said, concerns about rising inflation and interest rates could eventually push the Federal Reserve to raise interest rates, when analysts had been talking about a rate cut.
"That would really spook the market," Lancz said.
Sectors expected to lead earnings gains for the quarter include telecommunications and health care, while energy and consumer discretionary sectors are expected to lag, according to S&P.
Dickson said investors could see energy beating expectations, since oil prices rose sharply toward the end of the quarter, and technology results could surprise to the upside. U.S. crude futures <CLQ7> rose $1 on Friday to settle at $72.81, the highest settlement since August 15, 2006.
Investors also need to remember that share buybacks are at record levels, which changes the quality of earnings, said Howard Silverblatt, senior index analyst at S&P. Among buybacks was Home Depot Inc.'s <HD.N> $22.5 billion plan in June.
"You need to ask where is growth to be if you're a long-term investor," he said.
Buybacks boost per share earnings because they reduce the total number of shares available.
(Additional reporting by Ellis Mnyandu)
