Wall St gears for second quarter reports

NEW YORK (CNN/Money) -- After five quarters of falling profits, investors desperate for a break will be focusing on an early set of second-quarter earnings reports due next week. The question is, will the numbers say anything encouraging, and even if they do, will it matter?

Despite last week's run-up, stocks are having another awful year. So far in 2002, the Nasdaq composite has tumbled 29 percent, the Dow industrials are off about 8 percent and the S&P 500 has fallen 15 percent.

A few weeks ago, many analysts were still looking for profits in the second-quarter to rise after five quarters of declines. But now that's changed, and the estimate is that earnings in the second quarter were virtually flat, and in fact declined 0.2 percent from the same period one year earlier.

So the expectation for profit growth has switched to the just-started third quarter.

"As we kick off earnings season, it's going to be important what these companies are saying. Estimates are down so low, that if companies keep disappointing, markets are gonna have a big hurdle to overcome," said Brett Gallagher, head of equities at Julius Baer.

"However, expectations for this quarter in general are so low that it will be fairly easy for companies to beat and that can give us a short-term boost. But will it mean anything? Expectations for the subsequent quarters are still too aggressive and unrealistic," Gallagher said.

According to earnings tracker First Call, third-quarter profits are expected to show a gain of 16.5 percent and the fourth-quarter, a gain of 28.8 percent, compared to the same period a year earlier. For the full-year, profits are expected to grow 6.6 percent.

But that growth may not necessarily translate into a better second half of the year for stocks. Concerns about the potential impact of global terrorism, a weakening dollar and a seemingly endless parade of corporate scandals have knocked stocks lower.

"With scandal-ridden capital markets, a mediocre recovery and still high valuations, a lengthy bottoming and healing period is needed before we get a substantial upturn in equities," Charles Pradilla, chief investment strategist at SG Cowen, wrote in a research note Friday.

Investors, in particular, are reeling from the fears about corporate governance that have rocked markets since energy trading firm Enron's bankruptcy last fall. Most recently, telecom WorldCom (WCOME: Research, Estimates) said it improperly accounted for nearly $4 billion in expenses.

"There's going to be a period of tremendous disclosure about corporate practices during the quarter" as companies struggle to come clean, said Douglas Altabef, managing director at Matrix Asset Advisors.

"People are going to want to speak before they are 'outed' by someone else. In the short-term it will feel like a self-inflicted witch hunt, but in the long-term, its going to be very much a positive thing."

Quarterly reporting heats up

A number of big names are due to report results this week.

On Monday, aluminum maker and Dow component Alcoa (AA: Research, Estimates) is expected to report earnings of 29 cents per share, a 39 percent decline from the 48 cents per share it earned a year earlier.

Wednesday brings results from biotech Genentech (DNA: Research, Estimates) and Web media company Yahoo! (YHOO: Research, Estimates). Genentech is expected to earn 22 cents per share, 15 percent better than the 19 cents per share a year earlier. Yahoo! is forecast to have earned 2 cents a share, doubling its results from a year ago.

On Thursday, Dow component and diversified manufacturer General Electric (GE: Research, Estimates) is expected to report earnings per share of 44 cents, 12 percent better than the 39 cents earned one year earlier.

"GE will probably talk up their numbers, but I don't know if I buy it," said Julius Baer's Gallagher.

Juniper Networks (JNPR: Research, Estimates), a provider of communications equipment for telecoms, is expected to show a loss of a penny Thursday, down 111 percent from the 9 cents earned one year earlier.

Thursday also brings results from Rambus (RMBS: Research, Estimates). The chipmaker is expected to have earned 6 cents per share, a 49 percent improvement over the 4 cents it earned one year earlier.

But, as is often the case, it's going to be what companies say about forward-looking quarters that is going to be most influential.

"The bottom line on these conference calls is that the outlook is not going to be rosy," Paul Meeks, an independent technology analyst, told CNNfn's Street Sweep.

Although the pace of the economic recovery has slowed a bit of late, many sectors of the economy are still showing decent growth, economists say.

Reports last week showed that manufacturing activity and factory orders have held up, while construction spending and the services sector of the economy have eased.

Friday's ho-hum unemployment report from the Labor Department seemed to give credence to the likelihood of what economists are suggesting may be a "jobless recovery."

Unemployment, the most closely watched economic indicator, rose to 5.9 percent, in line with a survey of economists surveyed by Briefing.com, while the number of new jobs created only increased by 36,000, rather than the 75,000 expected.

"These top line numbers suggest we are into what's beginning to look like a jobless recovery," "We simply can't drive unemployment down if we're only adding 30,000 or 40,000 jobs. So, basically, we're looking at a situation where the recovery is calling, but the labor market isn't really picking up the phone," Jared Bernstein, labor economist at the Economic Policy Institute, told CNNfn's CNNmoney Morning.

This week also brings a number of significant economic reports.

On Thursday, the U.S. Department of Labor releases its Producer Price Index, a measure of the price of goods at the wholesale level. June PPI is expected to be flat, after falling 0.4 percent the previous month. Stripping out the often volatile food and energy components, the index is expected to show a rise to 0.1 percent from a breakeven reading the previous month.

On Friday, the Census Bureau releases June retail sales, projected to show an 0.6 percent rise after showing an 0.9 percent decline in May. Excluding the auto component, sales are projected to rise 0.4 percent, after declining 0.4 percent last month.

Also Friday, the preliminary University of Michigan reading on consumer sentiment for July is due. The index is expected to show a rise to 93.3 in July from 92.4 in June.