Expectations are low as earnings season kicks into high gear this week with 69 companies in the S&P 500 ready to report.
These heavy hitters will offer the first notable third-quarter reports and guidance from key sectors such as technology and health care, while providing an overall look at the health of the U.S. and global economy.
The consensus estimate is for earnings growth of 1.7%, a number that fell sharply after Friday when JPMorgan (JPM) reported a loss due to big limitation reserve charge. (Adjusted earnings per share rose 1% to $1.42.) Excluding JPMorgan, S&P 500 growth is pegged at 4.2%, less than half what analysts expected July 1.
"We're going to see pretty low earnings growth," said Greg Harrison, analyst at Thomson Reuters. "There was previously a lot of cost-cutting to increase profit even though revenue was not growing. They may be running out of options.
Expectations are for revenue growth of 2.7%, vs. 2.2% growth in Q2 and no growth in Q1.
Typically about two-thirds of S&P 500 companies top earnings views, but even if that pattern holds "we'll still be in the low to mid-single digit growth rate," Harrison said.
General Economic Malaise
In prior quarters, companies would blame economic woes in Europe, troubles in China, even problems with the weather as being among the causes for the weakness.
"We don't hear about that as much now," said Harrison. "Now they talk about general macroeconomic weakness, not specific issues.
The tech sector, historically among the strongest, should report another sluggish quarter. Intel (INTC) and Yahoo (YHOO) report Tuesday, followed by IBM (IBM) and eBay (EBAY) on Wednesday and Google (GOOG) on Thursday.
Analysts predict a 3.2% gain for S&P 500 techs. But they see a 13% gain for Internet software and services firms, including Google and eBay.
Overall secular trends across the Internet remain positive, helped by the mass expansion of smartphones and more and more devices being connected to the Internet, said Doug Anmuth, an analyst at JPMorgan in a report. Online advertising remains on a healthy growth path as well.
Don't Bank On It
Heading into Q3 earnings season, financials were expected to be the strongest S&P 500 sector once again. But after JPMorgan put its boot down, analyst expectations reversed from a 10.8% gain to -3.1%, said Harrison.
Citigroup (C), Bank of America (BAC), Goldman Sachs (GS) and Morgan Stanley (MS) report this week, along with several regional banks. While traditional banks have faced a sharp drop in mortgage activity, underwriters like Goldman and Morgan Stanley are likely to benefit from the high level of initial public offerings, now at a five-year high.
In the industrial sector, General Electric (GE), Honeywell (HON) and Ingersoll Rand (IR) are set to report on Friday. Those three companies are expected to report largely flat earnings and revenue.
Health care earnings this week include Johnson & Johnson (JNJ), St. Jude Medical (STJ) and UnitedHealth Group (UNH). The latter will be the first health insurer to release earnings and guidance since ObamaCare open enrollment began Oct. 1.
The group is expected to report earnings growth of 3.6%, fueled by drugmakers and equipment makers. But analysts see a 4% decline from managed care firms, Harrison said.
Despite sluggish earnings and economic growth, stocks are faring well. The S&P 500 index is up 19.9% this year.