Profits look strong, but doubts vex investors

By Leah Schnurr

NEW YORK (BestGrowthStock) – U.S. earnings could be strong enough to get stocks out of their funk, but with the outlook uncertain, investors are still positioned cautiously.

Estimates for S&P 500 companies have risen since the start of the year, but the drumbeat of lackluster data has been the overriding focus for investors worried that slowed growth could eventually hit corporate profits.

“There’s a disconnect between the expected profit growth that’s printed and the market’s pricing,” said Nick Kalivas, senior equity index analyst at MF Global in Chicago.

This divergence suggests Wall Street is at a crossroads. With stocks considered cheap, markets could be set for a pop if earnings surprise to the upside. But if chief executives give cautious guidance for the rest of the year, the bears worried about a double-dip recession might become more entrenched.

“There is this opportunity that if earnings season is decent, people will believe the value story and they’ll bring some money back into the market,” said Kalivas.

Analysts are expecting second-quarter earnings to grow by 27 percent, according to Thomson Reuters data. This is up from the 22.4 percent that analysts were anticipating at the beginning of the year.

“The problem is once we get past some of this price action, people are still very concerned about the regulatory environment and you’re still fighting a slow growth environment, so that probably takes some off the upside,” Kalivas said.

PUNISHMENT FOR GOOD NEWS

The worry, analysts say, is that results from Nike Inc (NKE.N: ) and FedEx Corp (FDX.N: ) in June could be a prelude for the earnings season to come. The companies reported fourth-quarter profit (Read more your timing to make a profit.) that matched or beat the Street’s view but gave disappointing outlooks, and the stocks were hit hard.

Bullish investors got a bit of a cheer on Wednesday. Stocks saw their best day in more than a month after custody bank State Street Corp (STT.N: ) forecast quarterly operating earnings would surpass expectations.

The news, coming after Wall Street’s extended slump, prompted investors to shift to a slightly more aggressive tone, said William Lefkowitz, chief options strategist at vFinance Investments in New York.

But there was little follow-through on Wednesday’s options activity, Lefkowitz said, with market indexes trading little changed by midday Thursday.

Data from Brown Brothers Harriman shows the expectations for operating earnings per share for the year have also risen since January. The mean estimate for 2010 earnings for the S&P has risen to $81.70 at the beginning of July from $77.28.

While the high of the range expected has been relatively flat, the low has improved significantly to $71.57 from

$62.80.

But those figures, and second-quarter reports, are by their nature backward-looking, leaving investors to sift through company comments and other market indicators for clues as to the second half.

“When you look at how the market’s traded, you don’t get the impression the market has been discounting a strong quarter by any means,” said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co. in San Francisco.

“Hopefully, when earnings come out, there are some surprises out there because I don’t think the market thinks there’s any hope for good news.”

Stocks are trading at 12-times forward earnings, a level generally considered cheap, according to Thomson Reuters data. The S&P 500 (.SPX: ) approached an oversold condition last week based on its 14-day relative strength index, but recent gains suggest investors have been enticed by bargains.

Lefkowitz suggests investors will need to be “aggressively conservative” in their positions, so they can capitalize on potential gains without getting burned.

“You don’t want to be overly aggressive, but whether you’re doing it with options or stocks, you want to position yourself where, if the market does well, you’ll benefit from it,” said Lefkowitz.

Alcoa Inc (AA.N: ) marks the unofficial start of earnings season on Monday. Banks and tech companies will also be in focus through the week with a number of major companies reporting including Intel Corp (INTC.O: ), Google Inc (Read more about Google Stock Analysis) (GOOG.O: ), JPMorgan Chase & Co (JPM.N: ), Bank of America Corp (BAC.N: ) and Citigroup (C.N: ).

Profits look strong, but doubts vex investors