New York: Investors battered by surging energy prices, disappointing economic data and the ongoing credit crisis will have something else to worry about this week—second quarter corporate results.
The unofficial start to earnings season takes place on Tuesday when aluminium producer Alcoa Inc. posts results. General Electric Co. on Friday will also be among the companies reporting.
The pair of firms on the Dow Jones Industrial Average index could give Wall Street a glimpse of what to expect when hundreds of other firms report results throughout the month. Not only are investors concerned that firms can’t beat already lowered expectations, but they’ll also be focused, undoubtedly with some scepticism, on what corporate executives forecast for the second half of 2008.
Curtain raiser: Alcoa’s Alain Belda. Alcoa and GE, which report results this week, could give a glimpse of what to expect this earnings season. (Photo: Bloomberg)
“The earnings, which are a reflection of the economy in general, have been going down and, unfortunately, there’s a lot of concern it will go down a lot more,” said Howard Silverblatt, Standard and Poor’s senior index analyst. “How long can they continue through the storm? Nobody believes the ‘worst is behind us’ comments from the CEOs because they can’t predict where this economy is going.”
Earnings from members of the S&P 500 are forecast to be down 10% for the second quarter. US banks and brokerages are likely to lead the pullback with another disappointing quarter. Firms such as Merrill Lynch and Co. Inc. and Citigroup Inc. are again expected to write off billions of dollars of assets rendered nearly worthless because of the global credit crisis.
Financial stocks last year contributed $60.7 billion of earnings to the overall S&P, and this time around the number is expected at $24.6 billion, according to S&P. And, in a demonstration of how dominant financials are, Silverblatt said earnings for the S&P 500 would rise 9% during the second quarter if banks and brokers were stripped out of it.
Wall Street finished last week with another decline, with the Dow Jones Industrial Average down 0.51%, the Standard & Poor’s 500 index down 1.21% and the Nasdaq composite index down 3.01%.
Investors are expected to remain anxious this week as oil approaches $150 a barrel. On Thursday, oil touched a trading high of nearly $146 before it settled at a record $145.29. The approximately 50% jump in the price of oil this year has weighed on both businesses and consumers and posed a challenge to US Federal Reserve policymakers who are trying to keep the economy out of a prolonged downturn.
Low interest rates have weakened the dollar, which has made oil more expensive. Now, with consumers forced to pay more at the gas pump, Wall Street is worried about a slowdown in spending—a serious blow to the economy as consumer spending accounts for more than two-thirds of US economic activity.
Investors will be looking to a light flow of economic data next week for insights into how surging energy costs are affecting the economy.
On Tuesday, the National Association of Realtors reports on pending sales of existing homes. The May index is expected to come in at 87.0, according to the median estimate of economists surveyed last Wednesday by Thomson Financial/IFR. That would be down from a reading of 88.2 in April.
On Thursday, the US labour department releases its weekly reading on unemployment claims. Economists anticipate a slight rise of 1,000 to 385,000.
On Friday, the University of Michigan releases its preliminary reading on July consumer sentiment. Economists expect the index to slide to 56.0 from 56.4 in June.
Also Friday, the US commerce department reports on the US trade deficit. After increasing to $60.9 billion in April, the trade gap is expected to have widened again in May to $62.3 billion.
Tim Paradis and Madlen Read contributed to this story.