’Tis the season for low corporate expectations

Companies have been scaling back earnings forecasts for weeks as part of a quarterly cat-and-mouse game with financial analysts. It’s not OK just to report a strong second-quarter profit - they also need to beat analysts’ forecasts. And companies are eager to do just that.

Earnings season got started Monday, when aluminum giant Alcoa reported results after the stock market close.

Wall Street analysts now predict that earnings for companies in the Standard & Poor’s 500 rose 3 percent in the second quarter compared with a year earlier, according to a survey by S&P Capital IQ. But as recently as April 1, they thought earnings would rise nearly 7 percent. At the start of the year they forecast a 9 percent increase. Companies that provide raw materials and technology firms are expected to drag down growth.

Another reason for the drop? Of the 111 S&P 500 companies that offered guidance, 87 were negative.

“You really have to take it with a grain of salt,” said Christine Short, associate director at S&P Capital IQ. Last quarter, she said, 65 percent of companies beat financial analysts’ estimates.

Quarterly growth over the past 15 years has averaged 8 percent. In the last eight quarters, analysts’ estimates have underplayed growth by about 4 percentage points, according to Short. That would mean earnings in the second quarter just ended are more likely to rise about 7 percent.

There are plenty of areas that could help lift corporate profits. Americans’ confidence is up and they are willing to spend again. The housing market rebound is also expected to push up earnings of home construction companies such as DR Horton, Lennar and PulteGroup. The consumer discretionary sector, which includes retailers like Target, entertainment companies like Walt Disney and the homebuilders, is expected to see growth of 12 percent.

The financial sector is also expected to see a jump, with 16 percent growth from a year earlier.

An aggregate of the S&P 500’s earnings per share is estimated at $26.41, up from $25.67 reported in the second quarter last year. That would be the second-highest quarterly earnings, only topped by the all-time high of $26.71 during this year’s first quarter.

Howard Silverblatt, a senior index analyst with S&P Dow Jones Indices, said the earnings should propel the S&P 500 index past its record close of 1,669.16 on May 21.

“The guidance has been negative, but not as much as historically,” Silverblatt said.

AP