Outlook dampens US earnings picture

Last week's celebratory mood in the stock market has given way to a more sober look at US earnings, thanks to a new wave of results that looked strong at first glance, but gave murky outlooks for the economy.

The market has seen this before, and investors fear quarterly results could turn into a repeat of the first quarter, when deep cost-cutting boosted company bottom lines while sales growth remained light.

This picture wasn't what investors wanted.

They hoped the second quarter would see the return of sales growth as companies pointed to the start of a recovery after the shell-shocked days of December, when fears of another depression stopped demand in its tracks.

Tuesday's biggest head fake came from Caterpillar, which exceeded analysts' estimates for earnings, but fell short of expectations for sales.

Caterpillar's release suggested the economy was stabilizing, but an executive on a conference call said the third quarter will be "very tough" on sales, suggesting that the company might lose money for the period.

Still, estimates for second-quarter earnings are improving. Data compiled by Thomson Reuters on Tuesday showed a 32.4 percent decline in profits for the quarter versus a year ago, compared with a July 10 forecast for a decline of 35.2 percent.

"By and large, what you're now seeing is the euphoria of last week giving way to a more sober assessment looking at a broader swath of the economy," said Joseph Battipaglia, market strategist at Stifel Nicolaus in Yardley, Pennsylvania.

"The outlook is still very guarded -- no massive V-shaped recovery in sight and earnings expectations for rest of year are either going to be lowered or stay the same."

United Technologies Corp lowered its 2009 forecast on Tuesday, while Texas Instruments Inc reported second-quarter earnings that beat expectations after Monday's closing bell, but an executive said the company must be prepared for slow to no growth for a while.

REVENUE VS EARNINGS

While earnings for the S&P 500 as a whole have been better than expected, there's a divergence between revenue -- or top-line growth -- and earnings -- or bottom-line growth.

With 75 S&P 500 companies having reported earnings as of Tuesday morning, earnings estimates have been exceeded by 16.1 percentage points, but revenue has beaten forecasts by just 4.4 percentage points, according to Brown Brothers Harriman, showing that the surprises, by and large, come from cost-cutting.

"At the end of the day, to really get things going, we need to see revenue growth," said Stephen Massocca, managing director of Wedbush Morgan in San Francisco.

It won't be seen at United Technologies, which said that cost-cutting will be responsible for profit growth in 2010. The company's chief financial officer said the company does not "anticipate a significant economic recovery in 2010."

United Technologies, the world's largest maker of elevators and air conditioners, cited weaker-than-expected equipment orders. For details, see

Heavy equipment maker Caterpillar, whose stock rose on Tuesday because the company raised its full-year outlook, said worldwide sales of its machines were down 47 percent in the three months ended June 30, compared with a drop of 43 percent in the three months ended May 31.

The earnings picture might look worse were it not for China, which has been cited by a number of companies as a positive, including Caterpillar and United Technologies, along with Intel Corp , Coca-Cola , Alcoa Inc , and others. For details, see

At the same time, companies are continuing to squeeze costs through expense management and layoffs. The U.S. unemployment rate is nearing 10 percent. And Federal Reserve Chairman Ben Bernanke said on Tuesday that unemployment was likely to remain uncomfortably high into 2011.

Yet challenges remain. Caterpillar has laid off more than 17,000 workers since the end of 2008. But the mid-point of its new 2009 forecast anticipates a plunge of more than 80 percent in earnings per share -- and it is planning rolling shutdowns of plants in the third quarter to deal with the ongoing downturn.

That's not the message of recovery Wall Street wanted to hear -- not after last week's 7 percent rally in major U.S. stock indexes following upbeat news from the likes of chip maker Intel Corp and Wall Street powerhouse Goldman Sachs Group.

After Tuesday's closing bell, iPod and iPhone maker Apple Inc reported quarterly earnings and revenue that beat the Street's expectations -- similar to Intel.

"The great thing we saw in Intel was we saw a revenue beat and great revenue growth, and that's kind of what got this whole party going," Massocca said.

That party may be on the verge of breaking up.

- Reuters