Corporate Earnings: Is Less Bad Good?

July starts the earnings season, with 70% of the issues expected to report by month end. The period is usually marked by early volatility from investors trying to use the initial reports to guess the rest of the market; which very often drives individual stocks in one direction for a few days and then the other direction when the accruals, along with the details, are reported. While summer trading is typically lower, I expect this earnings season to be a bit more volatile then usual.

The background is that Q2,’09 is expected to come in 17% lower than Q2,’08, but off 17% is better than the Q1 which was off 39% and much better than the negative earnings posted in Q4,’08, which of course was the first quarter in history where the index lost money. So, if less bad is good, Q2 will be a winner. And with Q3 estimated to be down only 6% from its prior year’s comparison, everything is going by plan – at least up to then.

Q4 is where ‘getting less bad’ needs to change to ‘getting better’. Earnings recoveries are not a U turn or V curve, they decline, flatten out and then start to improve. This recovery is being fueled by a few trillion dollars extra from the stimulus programs, reduced tax withholding schedules and lower Fed rates. We are seeing positive signs of the impact, but signs will need to change to actual sales by year end.

So where does that leave Q2. Reporting a penny more or less may not be as important this quarter as it has been historically. Instead the attention will be on how you earned your money. Year over year quarterly sales have declined at a double digit pace, and this quarter is expected to be slightly down but not double digit – again ‘less bad’. The programs in place were expected to kick in near the end of the second quarter, and have a greater impact on Q3, so there should be some signs in the reporting to support that hope. If not, the market will be quick to revaluate the situation, Washington test balloons for a second stimulus package may be floated, and companies, already nervous about commitment will take another look at spending, all of which can not bode well for consumer confidence or the market. For my full FILE please click here

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