Finance To Lead Second-Quarter Earnings Amid Lowered Expectations

Michael Teague  |

Second-quarter earnings season unofficially begins after the closing bell on Monday with aluminum manufacturer Alcoa’s (AA) report.

While companies such as Oracle (ORCL) and Nike (NKE) have already reported their earnings over the past week, Alcoa’s earnings are highly anticipated because the vast range of the company’s operations is seen as uniquely representative of the state of global economic growth. Analysts expect the company to reports earnings-per-share of $0.08, slightly up from the previous quarter, while revenue is expected to drop to $5.92 billion.

Overall, expectations for the Q2 earnings season that is just getting underway are low. Back in April, earnings growth for companies on the Standard & Poor’s 500 index was forecast at an average of 3.9 percent from the prior-year period, a figure which has dropped to 0.4 percent heading into the current week.

The finance sector, however, and in contrast to Q1, should be the bright spot over the next few weeks. JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC) report on Friday, which will give a more concrete picture of how the sector has advanced, but expectations are high. While the first quarter saw an overall earnings increase of 7.6 percent, the recently ended quarter should see the sector’s earnings jump to 18.6 percent. JPMorgan on its own is expected to report earnings-per-share of $1.43, well ahead of the prior year period’s $1.15.

After Wednesday’s close, Yum! Brands (YUM) earnings report should provide some insight into the Chinese economy, which has been a growing source of concern for investors in recent weeks with increasing fears about a lag in growth. While the fast-food chain has a worldwide presence, its performance is seen mainly as an indicator of Chinese consumer sentiment.

An average of analyst estimates says that Yum!’s revenue will be down nearly 8 percent on the prior-year period, while earnings-per-share should come in at $0.54, a decrease of 19.4 percent, after a first-quarter during which earnings were also 25 percent lower than the same period the year before.

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In terms of consumer sentiment in the US, Gap Inc. (GPS) will report its earnings on Thursday. Specialty retail alone is a limited measurement of spending trends, and the Gap has already been executing and seeing results from its shrewd implementation of a turnaround strategy over the past few quarters. The company’s stock in up over 40 percent year-to-date and almost 60 percent over the past 12 months, and it has beat earnings estimates in three out of the last four quarters.

Furthermore, Gap, like Nike (NKE), who met expectations on earnings-per-share and revenue in its report last week, has been increasingly relying on an internationalized, emerging markets-oriented strategy in order to decrease dependence on North American sales. The Gap is looking to generate 30 percent of its sales from overseas and online sales for fiscal 2013.

The tech sector is expected to have its second rough quarter of the fiscal year, with earnings forecasts dropping 8.3 percent on the prior year period, after a 4.2 percent year-over-year decrease in Q1. PC makers continue to be the tech’s softest spot.

Much like the first quarter, lower earnings expectations may help companies overall, but this first week of reports will be overshadowed to a large extent by another type of release on Wednesday, in the form of the minutes from Federal Open Market Committee’s June meeting, to be followed by another press conference from Chairman Ben Bernanke.

Investors will be anxiously watching the FOMC and Bernanke for further indications about the possibility of the tapering of fiscal stimulus beginning as early as September. Indeed, after Bernanke first floated the idea of the Fed’s cutting back on asset purchases by late-year during a press conference last month, indices dropped sharply for several days, with the S&P 500 down almost 5 percent, a loss from which it has not yet entirely recovered.

More hawkish insinuations from the Fed could undermine the ability of positive earnings data to drive stocks upwards, and could punish them more harshly in the event of underwhelming data. Ever since markets reacted frantically to the Chairman’s June 19 press conference, messaging out of regional central bank officials has been one of reassurance when it comes to the connection between continued economic growth and the tapering of bond purchases.

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