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In the earnings season that starts Monday, it’s guidance for the third quarter (and not second quarter numbers) that counts

posted on July 9, 2010 at 1:52 pm
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Today is the calm before the earnings storm.

Earnings season starts on Monday July 12 when Alcoa (AA) reports second quarter earnings.

And then we’re off to the races with Intel (INTC) reporting on July 13, Google (GOOG) on July 15 and three big banks, JPMorgan Chase (JPM), Bank of America (BAC), and Citigroup (C), reporting before the market opens on either July 15 or July 16.

This is one of those quarters when Wall Street will be not so much looking at what numbers companies deliver for the second quarter that ended, for the bulk of companies, on June 30 but instead listening to what companies say about the third quarter that ends on September 30.

Analysts are projecting that earnings of the companies in the Standard & Poor’s 500 will climb 34% in the second quarter from the second quarter of 2009.

But that’s almost irrelevant. The comparison with the slow second quarter of 2009 is an easy one. It’s the third quarter and what comes after that has Wall Street worried. The decline in stock prices from the April 23 high has been driven by worries that the pace of U.S. economic growth will slow in the second half of 2010. And so Wall Street will be listening to hear if companies have any better idea of what’s going to happen in the second half of 2010 than analysts do. (For more on what’s got Wall Street worried and when see my post Bullish or bearish? It depends on …)

I flagged the grounds for this worry back in February 2010.

At that time analyst projections called for S&P operating earnings to grow by 69% in the first quarter of 2010 from the first quarter of 2009. Second quarter growth was projected then at 43%. Third quarter earnings growth was estimated then at 26%.

“See the pattern here?” I wrote. “As stocks move further from the economic bottom in earnings at the end of 2008, year-to-year earnings growth will slow because the year-earlier quarter wasn’t quite so horrible. That makes spectacular earnings growth pretty easy to come by in the first half of 2010 and makes earnings growth in the second half of the year look increasingly ordinary (especially if stocks have kept moving up in price quarter by quarter). So the odds that stocks will deliver the earnings needed to justify higher share prices look pretty good in the first half of 2010 and then decline as the second half progresses.”

And this was before Wall Street started to worry about slowing economic growth in Europe, the United States, and China.

So you can bet that Wall Street is going into this earnings season with its heart in its mouth.

Expect volatility as the market acts on its fears by selling off shares of companies that issue warnings about growth in the second half of the year. Expect major earnings revisions as analysts react to earnings warnings by cutting the heart out of their earnings estimates for any company that disappoints. After raising estimates for 2010 earnings for most April and May, analysts have started to pull in their projections in the last week or so.

I don’t see a lot of upside even for companies that deliver both good second quarter earnings and good second half guidance. To me this looks like a sell on the good news quarter for much of Wall Street.

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  • javos on 9 July 2010

    I agree, Jim. Collectively, I expect earnings season to be a net negative for the market, not so much because of actual second quarter earnings, but because the market is a discounting mechanism for FUTURE earnings, which are becoming more problematic by the day. Witness rising home foreclosures, rising strategic defaults, rising un- and under-employment, rising sovereign default risk, all now being reflected in the steady buying of Treasuries

  • Run26.2 on 9 July 2010

    Off Topic… Financial Bill Surprise:


    “The Kanjorski Amendment wasn’t a surprise. It is an entirely reasonable reaction to the too-dangerous-to-fail experience of 2008-2009. The surprise here is that the bank lobbyists weren’t able to get it taken out or entirely watered down. The supermajority decision-making at the level of the risk council might seem like a weakening from the original Kanjorski proposal, but it also helped keep political support for what is, at its heart, a very radical idea.”

  • greedibanks on 9 July 2010

    What happened to Intel? They had good numbers and good guidance last quarter yet they sold off all quarter. I’ll b very interested to see if they are still so upbeat this quarter and how the stock reacts.

  • edelay on 9 July 2010

    Off topic for this post. Concerning the article about stocks being cheap. I thought you had positions in teva and ctrip. Did you sell?

  • vintonbuck on 9 July 2010

    I bought heavily last week on the dips and sold heavily yesterday and today on the bounces; not waiting for next weeks earnings statements. I have no idea which way the market is going to go at any given moment, and never buy at the exact low nor sell at the exact high. I just take a few morsels out of the middle whenever I can get them. Good Luck to all whatever your gambling (oops I mean investing) style be.

  • bobkkwan on 9 July 2010

    What is your assessment of FTR which just came off from VZ recently? In particular, with the dividend yield at over 13% is it too good to be true?

  • duwach on 9 July 2010

    When JP Morgan was asked the secret of his financial success, he said “I bought too late, and sold too early.” So, taking your morsels is in good company.

  • jamba on 10 July 2010


    You mention liking WDC right now, is your thoughts the same about STX?

  • USDAportfolio on 10 July 2010

    Morningstar has a good article regarding the recovery in consumer spending:


  • DJBarber on 11 July 2010

    China Money Supply, Lending Growth Slow on Curbs (Update1)


  • javos on 11 July 2010

    USDAportfolio, how does Morningstar’s data square with reported declining consumer credit and declining sales tax revenue. Further, one would expect consumers, now saddled with a damaged balance sheet (reduced home equity, reduced income, reduced financial investments, and heavy indebtedness) to reduce spending, particularly the millions of “boomers” approaching retirement. Any insight here?

  • javos on 11 July 2010

    Further, USDAportfolio, if consumer spending has virtually completed a rebound, why do we see so many consumers stocks in decline (XRT, RTH), even flashing bearish signals (50 DMA crossing below 200 DMA)? Surely, the “smart money” would be buying instead of selling. Morningstar’s Kool-Aid is not for me!

  • java12jack on 11 July 2010


    I see were you like WDC do you have any other Tech stocks that you like on a pullback?

  • vintonbuck on 11 July 2010

    Thanks for the info. regarding J.P. Morgan

  • USDAportfolio on 12 July 2010


    The article’s second table implies that consumer spending is still 2% below the pre-recession highs, and that many categories have shown no real recovery to date. I’m not surprised, however, that spending on health care, food, and small luxuries has returned to normal.

    The main conclusions I draw are that health care and food spending is very resilient and “recession-proof”. Again, no surprise. One could use the information to position his or her investments depending on an assessment of where the economy is headed. If concerned about a double dip, then health care, food, and small luxuries stocks may be what you want to own. If one thinks the larger economy is headed for a rebound, other categories, such as clothing, insurance, and motor vehicles have more room for growth.

  • sigli on 12 July 2010

    USDA thanks for the tip. I’m working on an idea of move up buyers (income gains + low inflation = happy spenders). Do you have any retail plays that fit the bill?

  • EdMcGon on 12 July 2010

    On the surface, STX and WDC look very similar. But STX had a bad year last year. I’m not sure why without doing more research. While WDC showed a downturn too, they still remained quite profitable, whereas STX took a loss. I would stick with WDC because of the consistency they’ve shown over time.

  • Seaturtlelady on 12 July 2010

    Heyyy Ed…

    Are you still looking at 30.00 as an entry point for WDC??

  • EdMcGon on 12 July 2010

    I’m still looking, but I’m not in any hurry. I’m not sure we’ve seen the bottom yet, so there’s plenty of time to bargain shop. ;)

    Yep. :)

  • EdMcGon on 12 July 2010

    STL (and everyone else),
    One other thing I’d remind you. We are in a buyer’s market. The buyers set the price. If you are willing to be patient, and your buy target is reasonable, you WILL get the equity at the price you want. It may take you awhile, but be patient. And if you don’t get the bargain you want, move on to another stock. There are plenty of bargains to be had. Don’t get stuck on one.

  • Seaturtlelady on 12 July 2010


    Thanks for the advice! I’ve been busy buying and selling since you’ve been on vacation! :-)

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