Poor Profits Won’t Crimp Markets’ Bully Run? Some Upcoming Second-Quarter Earnings Reports Will Produce Disappointments For Wall Street

As the nation’s biggest corporations release their second-quarter profit reports over the weeks to come, some will inevitably fall short and disappoint Wall Street.

Their stocks will be pummeled. Just ask executives of Intel and Nike, who warned of weakness in advance.

Nevertheless, with profits expected to grow an average 7.8 percent for the companies of the S&P 500 stock index, analysts say the market should easily shake off any bad news and continue its blistering pace. As the Dow Jones industrial average closes in on a lofty 8,000, that’s one less thing to spook jittery investors.

“Overall, I just don’t see the market terribly worried about earnings,” said Peter Canelo, a U.S. investment strategist at the brokerage firm Morgan Stanley Dean Witter.

Earnings season can be a particularly difficult time for the stock market. Corporate profits are one of the main drivers of share prices, and word of significant shortfalls can have a devastating effect. Last July, earnings weakness contributed to a broad selloff that took the Dow down more than 10 percent.

Many companies feel warnings ahead of time can soften the blow.

On May 29, Nike announced that its profits for the most recent quarter would fall short of Wall Street’s expectations. Its stock was sent 13.5 percent lower that day.

When the actual earnings came out last week, slightly below analysts’ expectations, Nike shares fell just 1 percent.

Intel, a bellwether for the technology industry, announced on May 30 its second-quarter results would be weaker-than-expected, and its stock lost 7.5 percent of its value. The impact on actual earnings is yet to be seen. Intel’s profits are due July 15.

Earnings growth in the second quarter, the three months through June 31, is expected to remain healthy but represent something of a slowdown from the prior two quarters.

Growth of 7.8 percent for the S&P 500 companies, which is compared to the same quarter a year earlier, follows improvement of 13.6 percent in the first quarter of this year and 12.5 percent in the fourth quarter of 1996, according IBES Inc., a research firm. Oddly, the slowdown may represent a bit of good news.

“It sort of bolsters the Fed’s decision not to raise rates,” said Joseph Abbott, U.S. research manager at IBES.

The Federal Reserve’s decision not to raise interest rates at its most recent policy meeting last Tuesday and Wednesday reflects the central bank’s belief that the economy is not growing so fast that it needs to be slowed with higher rates. That’s good news for corporations, since higher rates tend to diminish consumer demand and raise borrowing costs.

Another bit of good news: The second-quarter slowdown in profit growth should reverse course quickly.

“We expect to see earnings pick up again in the third and fourth quarters to 13 percent,” Abbott said. Profits, of course, are company-specific. When IBES looks at the universe of all 6,000 companies it tracks, which includes more fast-growing, small companies, its combined earnings should be up 10.5 percent in the second quarter, as opposed to just 7.8 percent for the S&P 500.