Earnings season already looks like a train wreck

The pre-announcements have been decidedly ugly, running about 7 to 1 negative to positive.

By MSN Money Partner Jun 24, 2013 1:00PM

CNBCBusinessman with face down on desk © Tetra Images, Tetra images, Getty ImagesBy Jeff Cox


Companies haven't even started posting second-quarter earnings results yet, but the early picture isn't pretty.


The pre-earnings season is often referred to by market insiders as the "confessional" -- a time when corporate America starts letting shareholders know the truth between earnings perception and reality.


If this quarter's version is a reliable indicator, there will be some serious penance handed out once announcements officially begin in two weeks.


Earnings pre-announcements have been decidedly ugly, running about 7 to 1 negative to positive.


That's the worst level since the first quarter of 2009, when, in the words of Citigroup chief strategist Tobias Levkovich, "the global economy was sitting on the edge of the abyss undergoing a financial crisis and near systemic meltdown."


Alcoa (AA) traditionally kicks off earnings season, with the Dow Jones Industrial Average (DJI) component and aluminum producer expected to show profit of 10 cents a share.


But more broadly, Wall Street consensus expects little profit growth in S&P 500 (SPX) companies for the second quarter.


That could be bad news for stocks, considering that earnings per share collectively has closely mirrored the 140% growth in the stock market index since the March 2009 lows.


All the market talk about what the Federal Reserve has in store, Levkovich said, has come "almost without spending any time looking at earnings estimates or trends less than a month before second-quarter results are released."


"Such a thought process seems ill-founded since earnings matter the most for equities, in our opinion, and there is relatively robust statistical evidence to back up that contention," he said. "In this respect, we have been a tad shocked by the surge in negative-to-positive pre-announcement trends that make 2009's surge appear less worrisome in retrospect."


Indeed, a flat earnings outlook suggests a flat market or worse, particularly after the sour reaction following last week's pronouncement from Fed Chairman Ben Bernanke that the central bank's $85 billion a month liquidity program could wrap up in 2014.


Levkovich is no alarmist. His team espouses what it calls a "Raging Bull" theory that sees a strongly positive long-term market outlook.


But his words do fit with an increasingly likely outlook in which the market will be at the least hard-pressed to match the 11.6% year-to-date gains on the S&P 500.


Bullish investors have been counting on growth to fuel the next leg of the rally.


Profit outlooks, though, seem too rosy.


S&P Capital IQ projects the third quarter to show 6.7% gains and the fourth quarter to register 11.6%. Levkovich calls the expectations "a bit too optimistic," which seems like an understatement considering that most economic indicators outside of housing are showing signs of a slowdown.


He sees the future entailing a healthy pulling back of earnings estimates, which investors should watch closely.


"We suspect that such trimming may come about over the next six months, rather than in one fell swoop," Levkovich said. "Thus, future estimate cuts could be a drag on equity prices and investors need to shift their attention away from just watching every wiggle out of the Fed."


More from CNBC

Jun 24, 2013 2:03PM
This jobless recovery has been achieved largely through increases in productivity, and I don't think companies have been investing as they needed to in R&D, new product development and production capacity. You can only stretch existing resources so far, and I think we're now seeing the end of that - it'll take some bold investments by companies to get them on track for continuing growth, and falling stock prices and worries about growth seldom set the stage for that.
Jun 24, 2013 2:53PM
Gawdamighty, what a wonderful world it would be if only there was no need to pay the help!
Jun 24, 2013 8:50PM

Subtract out companies borrowing to buy back stock and increase earnings per share, and you reveal the following...


2 quarters of falling top line sales, 3 quarters of falling unit sales...

2 quarters of falling NET profits...


All in all a sad economy, on Wall Street and Main Street...  Welcome to Obamanomics...


You cannot TAX and PRINT your way to Prosperity, nor can you BORROW and SPEND your way out of Debt...  "57  states" and his democrat  henchmen continue their war on business and the middle class.

Jun 24, 2013 4:07PM

We have got to change our Constitution in a way that power is taken away from Government and makes the America people directly responsible.


1.     Taxes must be taken off of everything except final consumption. When a family goes to the grocery store and buys $100 in groceries and the checker add $30.00 for federal tax, $25.00 for state tax $5.00 for local taxes and $14.00 to payoff the debt, the crap will come out of the heads of the America people about the cost of Government. Also, no person or item is exempted, everyone pays. Americans will be ready to fight back with gusto!!!!


2.     Take away the power of Congress to pass legislation. All legislation (bills) must come before the people to be approved or disapproved. We have the communications capacity via the internet, etc. to do this. Furthermore, all bills must be broken down by item and a cost must be accessed to each item. We need line item voting power.


3.     Any person or group, who can obtain 3% of the registered voter’s signatures, can design and/or present a bill (legislation) to congress. . Congress must debate, approve or disapprove legislation; however, again the people must approve or disapprove the legislation.


4.     We need an accounting system that is as accurate as possible, so Americans know where their tax money is going and can make decisions. 


With these new Constitutional tools, there will be 300 million Americans who will decide what they want to spend their dollars on. Our government and our nation would be changed forever. This recession and federal debt maybe a great blessing, in that we will advance our democracy, freedoms and life, liberty and the pursuit of happiness. Or become slaves to our government. There is no way the United States Congress is going to solve this Debt problem. The American people are going to have to do it themselves. We are going to have to change our Constitution. There is no other way.

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