Our Terms of Service and Privacy Policy have changed.

By continuing to use this site, you are agreeing to the new Privacy Policy and Terms of Service.

Bulls face 1st quarter earnings test

chart_earnings_outlook.top.gif By Ben Rooney, staff reporter


NEW YORK (CNNMoney) -- The quarterly celebration known as earnings season gets underway this week, and investors are eager to see how a resurgent Corporate America is coping with rising energy and commodity prices.

Dow (INDU) component Alcoa (AA, Fortune 500), the unofficial harbinger of earnings season, reported Monday its best quarterly profit in nearly three years.

Later in the week, investors will get results from JPMorgan (JPM, Fortune 500) and Google (GOOG, Fortune 500), among other companies.

As of last week, earnings for the companies in the S&P 500 (SPX) are expected to be up 11.5% over the first quarter of 2010, according to estimates from Thomson Reuters. That compares with 37% earnings growth in the fourth quarter of 2010, when year-ago comparisons were still relatively easy.

Revenues are expected to rise 8% in the first quarter versus the same period last year. That would be unchanged from the fourth quarter, when sales finally started to pick up for many companies.

Gas prices surged in the first quarter, and although they remain below the record highs from 2008, prices are expected to continue moving higher into the summer. That could spell trouble for the nascent rebound in consumer spending and put pressure on top-line sales growth.

At the same time, prices for many industrial and agricultural commodities have been sharply rising. Food producers have been looking for ways to deal with higher costs for wheat and corn, while rising cotton prices have led to hand wringing in the apparel industry.

"We're already starting to see some companies pass on cost increases," said Doug Roberts, chief market strategist at Channel Capital Research. In particular, he pointed to shrinking portion sizes in the food industry and the myriad of fees that airlines have come up with to deal with higher fuel costs.

While the outlook for the first quarter is still relatively robust, some analysts say the recent spike in oil prices and other cost pressures could put a damper on this quarter's earnings.

"I think you'll hear more about that in the guidance for the second quarter, as we look forward to input costs going up," said Kate Warne, chief market strategist at Edward Jones.

But other analysts say companies have the wherewithal to absorb higher costs and insulate their bottom lines from rising energy and commodity prices.

Many U.S. companies are still benefiting from the weak dollar, according to Alec Young, an equity strategist at Standard & Poor's. He said about half of all sales for S&P 500 companies come from overseas markets, which are worth more when converted into dollars.

"Input costs are expected to rise, but so are revenues," said Young.

In addition, the biggest cost for most companies is labor, which remains cheap because of the lousy job market, he added.

Corporate earnings rose throughout 2010, while sales growth was lackluster for most of the year, suggesting that cost-cutting was driving profitability. But the gradually improving economy has raised optimism about so-called organic earnings growth.

Ethan Anderson, senior portfolio manager at Rehmann Financial, said gas prices have not yet reached the level where companies and consumers will start cutting back.

But the earnings outlook for the rest of the year is murky, as government stimulus programs implemented late last year wind down and corporations are forced to stand entirely on their own, he said.

If energy prices spike, all bets are off.

"Higher energy prices certainly do not help us," said Anderson. "Maybe we'll be able to over come it, but I'm not convinced yet." To top of page

Overnight Avg Rate Latest Change Last Week
30 yr fixed3.85%3.86%
15 yr fixed2.97%2.94%
5/1 ARM3.15%3.08%
30 yr refi3.96%3.97%
15 yr refi3.07%3.04%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 16,058.35 -469.68 -2.84%
Nasdaq 4,636.11 -140.40 -2.94%
S&P 500 1,913.85 -58.33 -2.96%
Treasuries 2.17 -0.03 -1.27%
Data as of 8:41pm ET
Company Price Change % Change
Bank of America Corp... 15.58 -0.76 -4.65%
Apple Inc 107.72 -5.04 -4.47%
General Electric Co 23.88 -0.94 -3.79%
Ford Motor Co 13.72 -0.15 -1.08%
Microsoft Corp 41.82 -1.70 -3.91%
Data as of 4:00pm ET

Sections

McDonald's has been testing an all-day breakfast menu in several markets for months. Now it has said when the change will go nationwide: October 6. More

Iran could be pumping more than four million barrels of oil a day by the end of 2016, the country's oil minister tells CNN in an exclusive interview. More

A California judge granted class action status to former Uber drivers who claim they should have been classified as employees instead of contractors. More

How do you run a successful crowdfunding campaign? Indiegogo's CEO Slava Rubin offers his top tips and mistakes to avoid. More

Here's what you need to earn to afford a home in the 27 biggest metro areas in the country, according to HSH.com. More