Economic, IT Fears Cut Q2 Profit Hopes

Investor's Business Daily

Corporations hopped over the low bar that analysts set for the first quarter. Now their modest outlooks, plus a heap of headlines and macro head winds, are keeping expectations in check for the second quarter.

Recent economic data suggest U.S. and Chinese growth are slowing. Messy elections and other trouble in Europe aren't helping. Neither did a grim outlook from Cisco Systems (CSCO - News) on Wednesday, which sparked fears of a drastic slowdown in tech spending.

And Thursday night's surprise announcement of a $2 billion trading loss by a JPMorgan Chase (JPM - News) division triggered a new round of calls for tougher regulations.

"It was many thimbles' full of good news, washed away by buckets of the bad macro news," said Lawrence Creatura, a portfolio manager with Federated Investors.

With 91% of S&P 500 results in, Q1 profits are seen growing 7.9%, the smallest gain in 10 quarters, according to Thompson Reuters. But that's more than double sharply reduced expectations for 3.2% growth before the reports came in.

Analysts are tamping back expectations for Q2, which is now half over. They see growth of 8.4%, down from 9.2% on April 1 and 10.1% on Jan. 1. "Analysts saw how they really underestimated things in the first quarter, and so aren't lowering estimates as fast now," said Greg Harrison, Thomson Reuters' corporate earnings research analyst.

Q2 Warnings HighCompanies have delivered 3.3 negative pre-announcements for Q2 to every positive one, the weakest at this point in the quarter since the end of 2008.

And a big beat from Apple (AAPL - News) polished Q1 numbers. Without the iPad and iPhone maker, first-quarter profits are up a more modest 5.6%.

The utility group slipped sharpest, with an 8.4% decline in profits, as warmer winter weather kept furnaces turned down.

The telecom sector, though weak, delivered the most upside surprise, thanks to a much lower-than-expected loss from Sprint Nextel (NYSE:S).

Telecom and technology are the only sectors where analysts are raising Q2 growth targets.

Analysts expect overall profit growth to rebound at year-end, predicting a strong 15.6% in Q4, Thomson Reuters data show.

Just a handful of retailers and a smattering of stocks in other sections are left to report Q1 results.

Retailers and shoppers have proved themselves resilient these past few months, Creatura says.

"The economy is experiencing a stuttering, stumbling recovery, but it is a recovery nonetheless," he said. "Skilled management teams have figured out how to navigate this environment and provide honorable returns to shareholders.

However, shares of Macy's (NYSE:M), Kohl's (KSS - News) and Nordstrom (JWN - News) stumbled during the week after disappointing results or outlooks. Fossil (FOSL - News) dived nearly 38% on Tuesday after sales fell short and the watch and accessories maker slashed its full-year guidance.

On Tuesday comes Home Depot (HD - News) and TJX Cos. (TJX - News) — parent of T.J. Maxx and Marshalls — along with midtier department store J.C. Penney (JCP - News).

Target (TGT - News) is on deck for Wednesday, along with Abercrombie & Fitch (ANF - News), Limited Brands (LTD - News) and Staples (SPLS - News). Farm and construction equipment seller Deere (DE - News) reports that day as well.

On Thursday comes Wal-Mart Stores (WMT - News), Gap (GPS - News), Dollar Tree (DLTR - News) and a slew of others.

Salesforce.com (CRM - News) also reports that day, answering questions as to whether the on-demand software maker — and the IT sector — is seeing weaker demand.

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