Experts Weigh Jobs Fallout, Service Sector, Earnings

By BusinessWeek staff

The early summer warming trend in U.S. economic data gave way to a sudden chill with the release of a worse-than-expected June jobs report on July 2, with the news sending stock indexes sharply lower. The market was still feeling the aftereffects of that disappointment on July 6, though a better-than-expected reading on a closely watched service-sector indicator from the Institute for Supply Management (ISM) took the edge off.

What did market pros have to say about the jobs shocks, the service sector, and the upcoming second-quarter earnings season? BusinessWeek compiled comments from Wall Street economists and strategists on July 6:Michael Wallace, Action Economics

The damp June payrolls report [on July 2] cast a cloud over global economic recovery hopes, sowing doubt into equities and giving bonds a fresh boost to start the third quarter on perceived risk of a double-dip recession. After returning from the long holiday weekend in the U.S., investors will have to consider whether upcoming data will continue to rain on their parade or if some rays of hope will poke through the clouds again.

Clearly any Fed-tightening expectations were delivered a setback as the [yield on the 2-year Treasury note] rotated below 1.0%—nearly a half-point below its June peak and a full retracement of its explosive breakout. While equities will have to face the start of corporate earnings season and the upcoming G8 meeting, the bond market may face some headwinds of its own from $171 billion in [upcoming Treasury sales].David Wyss, Standard & Poor's

The Institute for Supply Management reported that its Nonmanufacturing Report on Business climbed to 47 in June from 44 in May. The market had expected a smaller improvement, to 45.7. The index remained below 50, showing continuing decline, but at a slower pace. The index has been below 50 for nine months, but the index is now at its highest level since September. Employment rose to 43.4 from 39.0, while business activity improved to 49.8, near breakeven, from 42.4.

The news is encouraging, especially after the worse-than-expected rise in the [ISM's] manufacturing index last week.Larry Adam, Deutsche Bank

The unofficial kickoff to second-quarter 2009 earnings season begins this week with Alcoa (AA) reporting earnings on [July 8]…. Preliminary estimates expect 2Q09 growth to fall approximately 30% (year over year), marking the eighth consecutive quarter of negative earnings growth. In our opinion, negative earnings growth will likely not trough until the 2009 third quarter before rebounding in the fourth.

All 10 [S&P 500 index] sectors are expected to have negative earnings growth for the second quarter. In addition, for the third consecutive quarter, earnings growth ex-financials are expected to be negative. The weakest sectors are forecasted to be the cyclical sectors (i.e. materials, industrials, energy).

Despite first-quarter 2009 earnings being better than feared, they were driven by cost-cutting and cost containment, not top-line revenue growth. For equities to move significantly higher, top-line sales will have to improve and mirror the recent economic "green shoots."

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