By Matthew Freedman
Judging from the latest earnings numbers out on Wall Street, one might presume that the second quarter wasn't quite as grisly as many initially suspected. According to First Call, of the nearly one-half of S&P 500 companies that has reported earnings, over 60% have topped analysts' forecasts, and another 25% have met them.
However, not only were those earnings forecasts revised sharply lower for many firms over the past few months, but the revenue picture, especially in the technology sector, continues to deteriorate. Drastic cost cutting has helped companies such as IBM and Sun Microsystems meet or beat earnings expectations even as sales, a better barometer of underlying demand, have fallen short.
And if in the form of layoffs, cost cutting will not help turn things around on the demand side. Rising unemployment could dampen consumer confidence and spending, thereby sapping revenues in coming quarters. Businesses probably won't pick up the slack as they wrestle with weak profitability, more stringent bank lending standards, and a generally murky global economic outlook. No wonder companies from Microsoft to UPS have warned of "low visibility" and tacked negative guidance onto their second-quarter earnings reports.
Nearly one-third of the Dow 30 is scheduled to post results for the second quarter during the week ahead. Telecom, PC, and Internet firms including Corning, Compaq, and Amazon.com are also on deck to report.
The week's sparse calendar of economic releases should leave investors plenty of time to mull over earnings. Wednesday's existing home sales report for June is the first major release, and will likely reveal a moderation in home purchasing after a near record-setting May. Friday's new home sales report is expected to corroborate the slowdown in residential buying, which has likely come in the wake of a slight rise in mortgage rates and expectations among consumers of slower job and income growth ahead. The housing market has been a bastion of strength amid the broader economic malaise, and an unexpectedly sharp downturn in housing activity could very well push the U.S. over the edge into recession.
Thursday's employment cost index is expected to reveal that despite deteriorating labor market conditions, wage inflation remained robust in the second quarter, albeit slightly weaker than in the first three months of the year. The still historically tight labor market is one of the last holdouts of price pressures in the economy. However, a loosening labor market should help curb wage inflation as the year progresses. Layoff announcements continue to pour in and, as Thursday's help-wanted index for June is expected to reveal, companies are curtailing hiring efforts.
On the heels of a bearish testimony from Federal Reserve Chairman Alan Greenspan, a few disappointing U.S. economic reports, and some mildly encouraging news from euro zone, Europe's common currency hit a two-month high against the dollar this past week. Though confirmation that the government has no intention of intervening to weaken the U.S. currency to appease distraught manufacturers, an off-the-cuff comment from the perpetually tongue-tied President Bush in defense of the administration's dollar policy on Wednesday hasn't helped the greenback: "The dollar is what it is based upon market."
Thursday's durable goods orders release will shed light on how business demand is faring in the midst of the profits recession. After rising in May on tulers of new orders for semiconductors and aircraft, goods orders likely forfeited some of their gains in June as capital spending by beleaguered businesses diminished.
Friday will bring long-awaited second-quarter GDP figures. Forecasts straddle the break-even point, with the consensus estimate settling just above zero. No matter what the Bureau of Economic Analysis' report reveals, though, the debate over whether U.S. economic growth dipped into the red during the quarter may very well carry on long after Friday. GDP could be heavily revised in coming months to account for yet-to-be-released inventory and international trade data for June.
The dollar could benefit, however, from the prospect of a rise in oil prices, which could come in the wake of a proposed production cut by OPEC. With oil traded in dollars in the global market, higher prices would boost demand for the currency. However, with growth slipping in nearly every member of the Group of Eight industrialized nations, which happen to be meeting this weekend in Genoa to discuss global economic conditions, the implications of a cut could be muted, even assuming that cheating among OPEC members is minimal.