Forget Greece and the Fed-- keep your eye on earnings
While recent financial headlines scream about the Greek financial crisis and the possible timing of the first Federal Reserve’s interest rate hike since 2006, a potentially greater concern for Wall Street and the seemingly endless bull run may be corporate profits.
The unofficial start of the second quarter earnings season kicks off Wednesday with traditional leader Alcoa (AA). PepsiCo (PEP) and Walgreens (WBA) are two other big names to report this week.
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Yahoo Finance’s Aaron Task says analysts don’t see corporate bottom lines getting any better than they were earlier this year.
“The expectation for earnings again is for a decline, about 4.5% is the forecast, similar to what we saw going into first quarter earnings season,” he notes. “Which set the market up for a surprise because things weren’t as terrible as expected.”
However, Task feels we should be a little more concerned this time around.
“We’re looking at a weakening trend,” he argues. “The revenue hasn’t been there. That’s why you’re seeing all this merger activity-- companies just aren’t seeing organic growth opportunities, so they’re looking to gain growth through financial engineering.”
And Task points out the reasons many companies gave for disappointing numbers in the first three months of the year really won’t work now.
“The dollar is certainly stronger in the second quarter than it was a year ago, but the dollar’s rampaging rally did moderate in the second quarter, so I think it’s going to be less of an accepted excuse,” he says. “Same with the weather. I’m sure there was some bad weather somewhere but it was not the deep freeze we saw in the first quarter.”
He notes that will put more pressure on executives to deliver good results for shareholders.
“You can’t use that as an excuse, so you better make your numbers,” he explains. “There will be less leeway for companies that miss this quarter than last quarter.”
As for reading the tea leaves on what kind of earnings season this will be, Task believes investors should be looking at one industry in particular.
“There has been so much focus on the transports, how weak they’ve been. And they’re very economically-sensitive,” he notes. “If they can show some sort of improvement that will definitely get people to be less concerned about what’s happening in the overall economy.”
