MarketWatch First Take
Diminished earnings expectations6/27/12 6:42 PM ET (MarketWatch)
SAN FRANCISCO (MarketWatch) -- The warnings are starting to pile up. Some come from the companies, some from the analysts. But they all point toward a batch of second-quarter earnings reports that are going to fall short of expectations formed just three months ago.
The latest thud to hit the market was from
The news sent O'Reilly shares tumbling 18% and triggered something of a stampede out of other auto-parts retailers. Read about the auto-sector selloff.
O'Reilly Chief Executive Greg Henlsee had a curious but plausible explanation for the downward revision. He said the company had figured that mild winter weather would pull forward a lot of sales into the first quarter, leaving a vacuum at the start of the second quarter that would gradually fill in. But that didn't happen; all those anticipated customers failed to materialize.
In an especially ironic twist, Citigroup cautioned Wednesday that even high-end consumers -- those same folks who resolutely kept shopping right through the depths of the recession -- can no longer be counted on to do their part for the economy. Even the wealthy, it seems, are worried about the future. Read about Citi's department-store ratings cuts.
All this is taking a toll.
According to Thomson Reuters, S&P 500 Index (SPX) companies' first-quarter earnings grew 8.1%. That growth rate is seen slowing to 6.3% in the second quarter. While the trend still points higher, it's a big letdown from forecasts at the start of the year, when most companies confidently predicted revenue and profit growth would accelerate as the year wore on.
That rosy prediction assumed several things that haven't exactly panned out. It assumed, for example, that Europe would contain its debt crisis; that credit and currency markets would calm dow; and most important, that unemployment would fall significantly, bringing consumers out to spend. Instead, the Conference Board's consumer-confidence index fell again in June, its fourth-straight monthly decline.
About the only thing boosting consumers' spirits these days is lower gasoline prices, which weren't even part of the earlier calculation and apparently still haven't fallen enough to make up for all the other disappointments.
These warnings set the stage for even more disappointments once second-quarter earnings begin rolling out in earnest in just more than a week.
On the other hand, they also make it easier to forgive companies that miss profit targets, and could even trigger relief rallies for those that meet or beat their targets.
But one thing can be counted on regardless: Diminished expectations raise investors' pain threshold, making it easier for them to come back for more.