Earnings: Here We Go Again

Enjoy your Fourth of July holiday because on Monday, July 8, earnings season kicks off—again. And it doesn’t look good. Analysts are expecting a lousy report card from corporate America with profits rising less than 1 percent!

Why should you care? Earnings are the main driver of stock prices. Despite all the talk and headlines about the Federal Reserve and when it will or won’t taper its massive stimulus program, what really counts is earnings. And Wall Street is getting back to fundamentals.

As Adam Parker, Morgan Stanley’s top U.S. equity strategist, wrote in a note to clients on Monday, “Second quarter earnings season will be more critical than normal. Why? Because unlike earlier this year, we now think ‘good is good and bad is bad,’ meaning the fundamentals will be in focus.”

And those fundamentals don’t look good. The bad news is companies in the S&P 500 have been reducing their profit estimates for their upcoming second quarter earnings. There’s been a surge in negative-to-positive pre-announcements. So far 87 companies have issued negative earnings guidance. That’s a record.

Why so many gloomy profit warnings? Get ready to hear one CEO after another blaming weak demand from China and the recession in Europe. And of course, the strong American dollar. They will complain that the mighty dollar means U.S. products sold overseas are more expensive.

What will Wall Street be focusing on from this flood of earnings? First, are companies beating estimates on both earnings and revenues? Second, and most importantly, what are CEOs saying about the outlook for the rest of the year? Is demand picking up—here in the US and around the globe?

Those are the kinds of questions we’ll be asking Alcoa CEO Klaus Kleinfeld next Monday when he joins us on “Nightly Business Report.” The aluminum giant is the first Dow component to release its quarterly results and that report is considered the official kick off of earnings season.

So enjoy the barbecues and fireworks for now, because it could be a gut-wrenching month for the markets.

Tune into “Nightly Business Report” on Monday, July 8 for our interview with Alcoa CEO Klaus Kleinfield.

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