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Recession to keep pressure on earnings
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The unofficial start to 2Q earnings season begins this week, trumping the fairly light post-holiday slate of economic reports.
Without a doubt, the recession has had a huge impact on the labor market, but it will heavily influence the profit outlook, as a 34% drop in earnings is expected according to Bloomberg News.
The parade of reports starts out slowly and will begin after the closing bell on Wednesday, with the release of earnings from Alcoa. The leading aluminum producer in the US is expected to report a loss of $0.34 per share, per First Call, versus a $0.66 per share profit a year ago.
The bottom line can be notoriously difficult to predict because there are many hard-to-forecast variables that go into the profit equation. Aluminum prices are well below last year's high and demand is down, but falling energy prices will likely minimize some of the damage (aluminum production is energy intensive).
Earnings won't be the only focus of investors because reports tell us what has already happened. Shareholders want an idea of what will happen.
Fed Chief Ben Bernanke has mentioned he anticipates the recovery will start sometime later in the year. June's unemployment report (see Thoughts on the unemployment report) cast doubt among some as to whether we'll see an upturn in 2009. Therefore, comments on the outlook may provide some hints as to whether economists have been too optimistic.
Bellwethers
Dictionary.com defines a bellwether as "a person or thing that assumes the leadership or forefront, as of a profession or industry." Needless to say bellwether companies can quickly and definitively set the tone for trading in a given day.
FedEx reported a couple of weeks back and didn't have much positive to say about the US economy for the rest of the year. Nokia, the largest maker of cell phones in the world, and IBM are scheduled to report next Thursday, followed by General Electric on Friday.
Caterpillar, the world's largest maker of heavy construction equipment, saw profits soar in the global boom that characterized a good part of the decade but it is now suffering amid the bust.
Like IBM, GE, and Nokia, what is said about the US economy will get plenty of attention. But I also want to get a sense of what's happening internationally, especially in China because the Asian giant has been reporting relatively favorable economic data.
Telecom will also be in focus when numbers come from Verizon Communications, AT&T, and Comcast, which will give us the latest look at how the recession is impacting spending on wireless and Internet access. Some analysts have noted that these have become must-have items, but tempting specials being offered by the communication giants may be suggesting otherwise.
Lastly, we can't forget about the banks. Many report in the front half of earnings season. Net income has been decimated by write-downs, and rising unemployment and problems in commercial real estate could put more pressure on already-weakened balance sheets.
For more info and a slightly different look at today's report: Please see my blog Tomorrow's Economy Today.
Separately, Have gasoline prices hit the summer peak is also available, and some thoughts on how the employment situation may be affecting the president.
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