With China's economy slowing, Europe's sinking further and the U.S. lukewarm, the second-quarter earnings season kicking off with Alcoa could be one of the weakest since 2009.
S&P 500 corporate profits are expected to rise 2.9% vs. a year earlier, according to analysts polled by Thomson Reuters. That would be a slowdown from 5.4% in Q1 and 6.2% in Q4.
Worse, revenue is expected to stay weak with growth of only 1.6%.
That's better than Q1's flat revenue "but it's still pretty bad," said Greg Harrison, corporate earnings research analyst with Thomson Reuters.
"Revenue is a big issue. It's been slow for several quarters," he said.
While companies have grown earnings by cutting costs and restructuring to become more efficient, profit growth has slowed gradually for two years.
"They've done all they can to improve their productivity to generate higher margins with very little change in revenue," said Hugh Johnson, chairman of asset management firm Hugh Johnson Advisors. "You wonder how much more they can possibly do. The answer is there isn't a lot more they could possibly do.
Still, he expects the economy to improve somewhat through 2013 and into 2014 "and that should be reflected in some improvement in the growth rate of earnings, but not a lot.
Downgrades have continued as 97 companies in the S&P 500 issued negative Q2 profit outlooks, compared to 15 positive views.
If the trend persists, it would translate into the most negative-to-positive ratio since early 2001, according to Thomson Reuters.
"Guidance has continually become more negative but this quarter it is far more negative," Harrison said. "It's been a long time since companies have had such a negative outlook.
Some observers think cautious management teams would rather lower expectations than end up missing views and then suffer stock-price shocks.
Most companies, as usual, will likely top analysts' tempered forecasts. Morgan Stanley analysts pointed out in a recent report that those reporting early — Adobe Systems (ADBE), FedEx (FDX) and Lennar (LEN) to name a few — beat views by 1.8% on average.
In their recent negative pre-announcements, management often cited struggles in Europe and weaker revenue growth in emerging markets, Harrison said.
Agilent Technologies (A) CEO Bill Sullivan, for example, noted that Japan's stimulus "hasn't kicked in" and that China's growth is slowing to 7% to 7.5%, on top of "continued issues in the U.S. and Europe.
"We are not going to get the type of revenue growth that is going to be able to maintain our margins," Sullivan said. Agilent's profit is now seen falling 22% for its July ending quarter.
Companies that are focused on the U.S. have generally showed stronger earnings of late than those that generate a lot of sales overseas, Harrison said.
Salesforce.com (CRM) and Tiffany (TIF) said the weaker yen has hurt their Japanese sales, he noted. Both gave negative guidance for Q2.
Sectors expected to show the strongest earnings growth in Q2 are telecom and financials, with gains of 18.7% and 17.6%, respectively. But revenue is seen growing less, 5% for financials and only 1.6% for telecom.
Industrials, materials and technology are expected to post single-digit declines in earnings, with revenue essentially flat or up slightly.
Once-booming Apple (AAPL) likely suffered a 20% profit decline amid a lack of new products and stronger competition. General Electric (GE) earnings are seen rising 6%, though that would snap a four-quarter string of accelerating growth.
But some leading companies are still delivering standout growth. Professional social networking firm LinkedIn (LNKD) should report an 88% earnings gain after EPS tripled in the prior quarter.
Energy companies are expected to grow 1.2% on average even though revenue is seen falling 7%.
Among other sectors, consumer discretionary earnings are seen growing 6%, consumer staples 2.9% and health care just 0.2%.