With the end of the second quarter approaching, analysts think earnings will soon take center stage in the markets again.
Though interest rates and subprime worries have rattled stocks lately, corporate profits will also be closely watched in the coming weeks. And many market pros think that--like the first quarter--the results will come in above unrealistically low forecasts.
"One of the key catalysts for stocks for the first quarter was the fact that estimates were too low," David Dietze, chief investment strategist at Point View Financial Services, told CNBC.com. "If, in fact, Wall Street generally is too pessimistic and earnings come in better than expected again, that would certainly be a bullish factor for the market."
Earnings expectations for the the S&P 500 in the second quarter now stand at 4.4% year-over-year growth, down from the 6.8% forecast at the beginning of the year, according to Thomson Financial. Wall Street also had low expectations for corporate earnings in the first quarter, with estimates dropping as low as 3.3%. Instead, first-quarter earnings ended up 7.8%.
The industrials sector is expected to be the best performer in the second quarter, rising an estimated 14%. Information technology comes in second, with an 8% growth forecast. Consumer discretionary is the only sector expected to show an earnings decline of 8%.
"I think we are going to have somewhat of a repeat because earnings estimates are too low, particularly among large cap stocks leveraged to global growth," said Joseph Quinlan, market strategist at Bank of America. "I think we'll see earnings at 6% to 7%. You are looking at a U.S. economy that rebounded to a degree in the second quarter. We're down from the double-digit numbers, but still running at a solid pace."
"I think Wall Street consistently underestimates the effects of the emerging world on U.S. companies," said Stephen Leeb, research chairman for The Complete Investor. "They focus on relatively slow growth in the U.S. economy when the rest of the world is growing at a rapid pace."
Dietze agrees that second quarter earnings are more likely to fall in the 6%-7% range. "The consumer, for the most part, has held in there," said Dietze. "We still have very strong employment data. We have seen a strong overseas economy, which is robust for us because they buy our goods and services."
Not all analysts are optimistic about the second quarter, however. Some are already seeing signs of trouble on the horizon.
"I'm seeing some trouble, particularly in retail," said Adam Lass, senior market analyst for Wavestrength Options Weekly. "We're starting to see some people come in now and rewrite the whole earnings picture. Specifically, we just heard troubling news from Best Buy and Circuit City and they are sort of the canaries in the coal mine for retail."
"We've only had about 14 or 15 companies reporting (fiscal quarterly results) so far, but what's different is half of those companies have missed numbers," said Douglas Cliggott, chief investment officer at Dover Management. "Eight companies in the last two weeks have missed their earnings expectations. That's very different."
Todd Salamone, director of research at Schaeffer's Investment Research, is concerned that expectations the results will beat forecasts could backfire on the market. "That could be a problem, thinking that we will see a repeat of the first quarter," said Salamone. "That could set the stage for disappointments."