Wall Street: Bracing for profit shock

Wall Street is set to post its seventh straight quarter of shrinking profits, threatening the strength of the recent stock advance.

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By Alexandra Twin, CNNMoney.com senior writer

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The S&P 500 this week.
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NEW YORK (CNNMoney.com) -- The five-week old stock rally faces its biggest test yet this week: The arrival of the first big basket of what is likely to be a rotten batch of quarterly results.

"Recessions are a great time to figure out who is winning and who is losing," said Kim Caughey, senior equity analyst at Fort Pitt Capital Partners.

"Overall, it's been a terrible quarter. That's no surprise," she said. "But seeing who is holding it together is important to investors."

Alcoa, as is typical, marked the symbolic start of the quarterly reporting period last week. But a wider range of marquee names trickle in this week as the reporting period starts to pick up a little speed.

Five Dow components are due: financial firms Citigroup (C, Fortune 500) and JPMorgan Chase (JPM, Fortune 500), tech leader Intel (INTC, Fortune 500), conglomerate General Electric (GE, Fortune 500) and consumer products maker Johnson & Johnson (JNJ, Fortune 500). Other non-Dow companies due to report include Google (GOOG, Fortune 500) and Nokia (NOK).

Reports are also due this week on housing, manufacturing, retail sales and consumer sentiment. But with analysts unsure that investors have fully accounted for the poor quarterly results about to roll in, earnings will be critical.

Big losses ahead: S&P 500 profits are expected to have fallen 38% in the first quarter versus a year ago, according to the latest from Thomson Reuters. Another down quarter would bring the losing streak to seven in a row, Wall Street's worst run since Thomson began tracking results in 1998.

Another dubious milestone: All ten economic sectors that S&P 500 tracks are expected to post year-over-year losses, a first in Thomson's history.

"The trend we are seeing that started in the fourth quarter of '08 is that the weakness has spread to every sector of the economy," said John Butters, senior research analyst at Thomson Reuters.

He said that in the fourth quarter of 2007, in which the recession officially began, only financials and consumer discretionary - which includes Ford Motor (F, Fortune 500) and General Motors (GM, Fortune 500) - posted losses. Those losses were substantial enough to drag down the overall S&P earnings and mask an otherwise mixed earnings reporting period.

But in the quarters since then, the weakness has spread to all industries.

In the first quarter, consumer discretionary is expected to post losses of more than 100% versus a year ago, due largely to the automakers and the retailers. Surprisingly, homebuilders, part of the sector, are expected to post quarterly earnings gains versus a year ago. However, that's largely because results a year ago were so abysmal that comparisons are easy.

After consumer discretionary, basic materials is expected to post losses of more than 80% versus a year ago, with weakness in chemicals, steel and mining a reflection of the slower global economy. Energy is on track to post the third-biggest year-over-year profit decline, of 56%.

Financials are expected to see profits fall by 46% versus a year ago, although once Wells Fargo's better-than-expected forecast from Friday is factored in, the number should drop down to just below 40%.

The sector expected to show the smallest drop in profits is healthcare, with forecasts for a drop of 3% versus a year ago.

The breadth of the earnings weakness is a trend expected to continue for at least another quarter, Butters said. Currently, Thomson expects second-quarter profits to have fallen 32% from a year ago.

With the economic outlook still murky, forward-looking projections are expected to be few and far between.

"Guidance is usually the key, but unfortunately managements don't know any more about the economy than anyone else does," said Timothy Ghriskey, chief investment officer at Solaris Asset Management. "A lot of companies say they won't give guidance in this environment."

Rally finding legs: Stocks have risen for five weeks straight since the Dow and S&P 500 hit more than 12-year lows. In that time, the Dow rose 22%, its best five-week run since May of 1933 when it gained 31%.

Although the initial spurt was driven mostly by traders, hedge funds and other market pros, the recent leg has seen more individual investors jumping back in.

Investors have poured money back into equity mutual funds over the last two weeks. In the week ended Wed. April 8, investors put $11.9 billion into stock mutual funds after adding $3 billion in the previous week.

Earnings

Tuesday: Goldman Sachs, considered to be one of the healthier banks, is due to report results before the start of trading. The financial behemoth is expected to have earned $1.60 after earning $3.23 a year ago.

On Friday, reports surfaced that Goldman is likely to announce as soon as next week a multi-billion offering of its shares to investors, as part of a plan to repay a $10 billion government loan.

Johnson & Johnson also reports results before the start of trading. The Dow component is expected to have earned $1.22 per share versus $1.26 a year ago, according to a consensus of analysts surveyed by Thomson Reuters.

After the close of trading, tech leader Intel is expected to report earnings of 2 cents per share versus 29 cents a year ago.

Thursday: JPMorgan Chase, reporting before the opening bell, is expected to have earned 32 cents per share after earning 68 cents a year ago.

Nokia also reports results in the morning. The telecom is expected to have earned 15 cents per share versus 38 cents a year ago.

Google reports after the close. The Internet behemoth is expected to have earned $4.95 per share after earning $4.98 per share a year ago.

Friday: Citigroup reports results in the morning. The Dow component is expected to have lost 37 cents per share after losing $1.02 a year ago.

Dow component General Electric also reports results in the morning. GE is expected to have earned 21 cents per share versus 44 cents a year ago.

Economy

Tuesday: Standouts on a busy day for economic news include a report on wholesale inflation from the Labor Department and one on retail sales from the Commerce Department.

The Producer Price index (PPI), a measure of inflation at the wholesale level, is expected to hold steady in March after rising 0.1% in February, according to a consensus of economists surveyed by Briefing.com. So-called "core" PPI, which strips out volatile food and energy prices, is expected to have risen 0.1% after growing 0.2% in February.

Retail sales are expected to have risen 0.3% in March after falling 0.1% in February, economists are estimating. Retail sales excluding autos are expected to have edged up 0.1% after rising 0.7% in February.

A report is also due in the morning on February business inventories, but it is not typically a market mover.

At 1:30 p.m. ET, Federal Reserve Chairman Ben Bernanke speaks at Morehouse College in Atlanta about the financial crisis.

Wednesday: The Consumer Price index (CPI) is due before the start of trading. CPI is expected to have risen 0.2% in march after jumping 0.4% in February.

March industrial production, from the Federal Reserve, is expected to have fallen by 0.9% after dropping by 1.4% in February. Capacity utilization, a measure of factory output, is expected to have fallen to 69.7% from 70.9% in February.

The NY Empire State index, a regional read on manufacturing, is due shortly after the start of trading. The index is expected to have improved modestly to negative 35 in April from negative 38.2 in March.

The government's weekly energy supplies report is due in the morning. The Fed releases its "beige book" semi-annual reading on the economy in the afternoon. Wednesday is also the deadline for income tax returns.

Thursday: March housing sector reports from the Census Bureau are the highlight of another busy day of economic news.

March housing starts are expected to have fallen to a 550,000 unit annual rate from a 583,000 unit annual rate in February. Building permits, a measure of builder confidence, are expected to have risen to a 550,000 annual unit rate, economists expect, from a 447,000 unit rate in February.

The Philadelphia Fed index, a regional read on manufacturing, is expected to have improved modestly to negative 32 in April from negative 35 in March.

The weekly jobless claims report is also due in the morning. Last week, claims stood at 654,000, while continuing claims hit an all-time high of 5.84 million.

Friday: The University of Michigan consumer sentiment index is expected to have risen to 58.5 in April from 57.3 in March. To top of page

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