The News Bee

Weak profit picture clouds outlook for U.S. stocks

Weak profit picture clouds outlook for U.S. stocks

If corporate earnings are the lifeblood of the stock market, then Wall Street’s vital signs may not be as healthy as last week’s run to new highs suggest. At the start of the first-quarter earnings season there was talk of a so-called “profits recession,” which in layman’s terms is a contraction in quarterly profit growth. But that didn’t materialize, as 67% of companies in the Standard & Poor’s 500-stock index were able to top analysts’ sharply lowered expectations. Heading into today’s trading session and with 462 of the 500 companies in the S&P 500 having reported results, first-quarter profit growth is projected to come in at +2.1%, up from an earlier estimate of -2.9% back on April 1.AP WALL STREET F USA NY

Still, sales and revenues have been weak. Only 44% of companies have topped revenue estimates, which is below the long-term “beat” average of 61%. And that suggests that sales are still slugging, due largely to the spike in the value of the dollar earlier this year, as well as an early year economic slowdown due to wintry weather.

The bad news: Talk of an earnings recession is likely to start anew as we near the start of the second-quarter earnings season. The reason: as of today, analysts are projecting a 2.5% contraction in second-quarter earnings, which is worse than the -0.4% projection on April 1. And with the valuation of the broad U.S. stock market now at 17.9 times estimated 2015 earnings (which roughly 2 points above the long-term average), according to Thomson Reuters data, a pick-up in earnings will be needed for stocks to stay at these elevated valuations, Wall Street pros say.

The S&P 500, which hit back-to-back all-time closing highs Thursday and Friday after weeks of sideways trading, was down 3.75 points, or 0.2% about 40 minutes before today’s opening bell. The large-company stock index closed at a record high of 2122.73 on Friday.