Investors can expect more bad news

USA Today

NEW YORK — With the first-quarter earnings season winding down, there's growing talk on Wall Street that stocks have bottomed and the worst of the "profit recession" is over. But corporate executives aren't nearly as confident. So investors should brace themselves for Round 2 of ugly earnings.

The reason: 244 U.S. companies have already issued profit warnings for the second quarter, putting it on pace to top the record-setting 907 negative announcements issued last quarter, said Chuck Hill, research chief at Thomson Financial/ First Call.

Profit warnings are running at twice the rate they did in the first quarter. "That is an ominous sign," Hill said. "Despite what the pundits say, there's still a lot of bad news to come."

The debate now raging on Wall Street is how the continuing flood of bad earnings news will affect the stock market in the months ahead. The torrent of cautionary statements didn't prevent the Nasdaq composite from scoring its fourth-best monthly gain ever in April.

Bulls say poor earnings and a steady diet of downward earnings revisions in recent months are already reflected in stock prices that are well off their highs. More ugly news, they say, is unlikely to drag prices down even lower.

Bears say the stock market won't be able to withstand the torrent of new negative confessions from corporate America. They question whether companies that do issue optimistic forecasts are basing them on real signs of business improvement or solely on blind optimism.

First-quarter earnings, while far from stellar, didn't turn out to be as bad as doomsayers predicted.

Of the 410, or 82 percent, of the Standard & Poor's 500 companies that have already reported, only 60, or 15 percent, came in below analysts' estimates, First Call said. On the positive side, 235, or 57 percent, beat expectations. But that is misleading because estimates for many companies were lowered substantially. Overall, S&P first-quarter earnings are down 5 percent from a year ago.