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Investors Expect Profits and Seek Clues to Future

Many Americans are still waiting for an economic recovery. But for corporate America, a recovery of sorts is already at hand.

The corporate earnings season, that quarterly rite of Wall Street, begins in earnest on Monday, and investors are hoping for some good news. Major corporations are expected to report some of their strongest profits in years.

Close-up of a pen on stock price chart
Close-up of a pen on stock price chart

“It has been one of the strongest profits recoveries ever,” said David S. Bianco, chief United States equity strategist for Bank of America Merrill Lynch. “You have got to go back to the Depression to find a profits recovery that outpaces this one.”

The question on many economists’ minds is whether this corporate recovery will last — and if it does, when it will yield jobs for recession-weary Americans.

This week, corporate bellwethers like Alcoa , Google , JPMorgan Chase and Intel are scheduled to report second-quarter results. While earnings will vary by company and industry, economists say that, taken together, the reports will point to some bright spots for the economy, as well as to some enduring obstacles.

Since profits plunged in late 2008, along with the economy, earnings have been increasing fairly steadily for many companies, partly because they have been coming off such a low base.

For the second quarter, earnings per share for companies whose stocks are included in the Standard and Poor’s 500-stock index are expected to have expanded 25 to 30 percent from the same period a year earlier. If the results beat analysts’ expectations, they could add fuel to the nascent rally in the stock market, bolster the pace of the economic recovery and possibly hint at what many Americans hope for the most: a return to hiring.

But analysts say they also believe that now, perhaps more than at any other time since 2008, the numbers will be only part of the story. Many investors will comb the results for clues about where corporate executives think their businesses, and by extension, the broader economy, will go from here.

How will companies weather the expiration of the federal stimulus program and tax cuts? How will they deal with the running financial crisis in Europe? What about exports and the looming midterm elections?

For now, the view from the corner office looks quite different than the view from the street corner.

“You are going to hear outlooks from companies that are more upbeat than the sentiments you are going to get from workers and households,” Mr. Bianco said.

So far, the rebound in corporate profits has not translated into a rebound in jobs. Many companies have cut costs and increased productivity. Manufacturers have mothballed plants and equipment. Consumers remain anxious.

With earnings reports looming, the stock market rose for the fourth consecutive day on Friday, rounding out its strongest week this year.

Economists said many investors would examine the business outlooks that companies provide even more than those companies’ income statements. The question is whether companies expect to expand and hire, or instead seem to be bracing for a double-dip recession.

“Investors look through the front window more than the rearview windows,” said David A. Rosenberg, the chief economist for Gluskin Sheff.

So how companies couch their latest results will be crucial.

“There is no magic bullet that is going to come out of the earnings period,” said Tobias Levkovich, the chief United States equity strategist at Citigroup. Guidance from reporting companies about the economy “resolves very, very near-term fears, but it does not take that three-, six-month fear off the table,” he said.

Mr. Bianco said several industries would be “bright spots” this earnings season. Many technology companies, for instance, are expanding in Asia. Capital goods businesses are positioned for growth.

In the financial industry, the wild card will be credit costs and loan-loss provisions, said William T. Fitzpatrick, an equities analyst who focuses on banks for Optique Capital Management.

Wall Street trading and capital markets businesses, which have driven the stunning recovery in bank earnings thus far, probably suffered in the second quarter given the volatility in the markets. Investment management was probably hurt, too.

“Everything is always in the context of expectations,” said Joshua Steiner, a managing director at Hedgeye Risk Management. “The expectations for the second quarter are fairly low on that portion of the business,” he said, “setting the stage for possible upside surprises.”

Earnings at energy companies were probably aided by higher oil prices, said Brian M. Youngberg, an analyst with Edward Jones. “You will see strong earnings growth driven by higher oil and natural gas prices.” In this industry, guidance will be crucial in determining the expected impact of the Gulf of Mexico oil spill on future earnings, he said.

Earnings in consumer discretionary companies are expected to rise 50 percent and those in the consumer staples industry 5 percent, Mr. Rosenberg said.

In manufacturing, companies are benefiting from rebuilding their inventories. Capital spending is contributing to growth but remains weak.

“What they are not doing is making capital investments in their own businesses,” Cliff Waldman, an economist for Manufacturers Alliance/MAPI, said of companies in the industry. “But they were ahead of a lot of other sectors in costs cutting.”

That means revenue is growing for many manufacturers, particularly exporters. Jobs are — slowly — starting to follow.

“So one would expect a pretty good earnings situation, in particular for large manufacturers that are connected to export markets,” he said.

Earnings at industrial companies are expected to grow about a third. Railroads and airlines are benefiting from reduced costs and a pickup in demand.

Still, for all the focus on this round of earnings, the real question is what lies ahead.

“The only thing anybody cares about now is what is going to happen in the next quarter,” said Howard W. Penney, a managing director for Hedgeye Risk Management.

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