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NEW YORK (CNN/Money) -
A big thank you to high oil prices.
For the second quarter in a row, the much-discussed "pronounced earnings slowdown" has essentially failed to materialize. And for the second quarter in a row, a lot of that has been thanks to a jump in energy sector earnings.
There are other sectors that have done well, too -- telecom has been surprisingly strong -- but it hasn't had the same impact as the energy sector.
"Energy is certainly the driver of growth in the second quarter, with the sector expected to see year-over-year growth of 41 percent," said John Butters, senior research analyst at Thomson Financial.
Second-quarter earnings are currently on track to grow at least 11 percent year-over-year, according to both Thomson Financial/First Call and Standard & Poor's. That's a blended figure comprising the more than 80 percent of S&P 500 companies that have already reported results and the forecasts for the remainder.
That 11 percent figure is also a big improvement from a month ago, when it looked like second-quarter earnings would come in at around 8 percent, breaking a three-year streak of double-digit earnings growth.
The problem is, strip out energy earnings growth and overall growth drops to less than 8 percent, according to Thomson Financial.
Earnings of 8 percent year over year are nothing to sniff at, but nothing to get overly excited about either, particularly in a rising interest-rate environment.
"The concern is that if a lot of the gains are in energy, that's good news for energy, but not necessarily good news for the economy," said Barry Ritholtz, market strategist at Maxim Group.
Overall, the 10 main S&P sectors have been topping forecasts by an average of around 4 percent in the quarter, Butters said. That's above the historic average of 3.2 percent but short of the 5 percent seen over the last two years.
Additionally, the third- and fourth-quarter forecasts have been largely muted to negative, with the notable exception of energy.
Earnings usually outperform, but...
When all is said and done, earnings typically beat estimates, with corporations tending to provide conservative outlooks.
However, the growth in both the first and second quarter of 2005 seemed to throw some market watchers for a loop.
"The Street was surprised with the strength of the earnings in both quarters," said Howard Silverblatt, equity market analyst at Standard & Poor's.
The stock market's July rally was likely a function of the realization that earnings were going to, once again, defy expectations.
However, third- and fourth-quarter pre-announcements so far have been pretty negative, creating some skepticism about the strength of the first-half earnings.
"There's some question of 'did the companies lowball the numbers?'" Silverblatt said.
"Nothing too bad has emerged regarding the third quarter," he added, "but I think a lot of analysts are going to be looking very closely at the numbers, wondering why the first half was so strong."
Or they may be looking to see if the threats to earnings growth in the first half have just been pushed off to the second half.
For example, Silverblatt noted that the impact of sustained higher energy prices did not seem to hurt corporate profits in the second quarter as much as had been expected, nor did a recovery in the U.S. dollar. However, these could be factors for the second-half earnings.
Oil prices have been rising all year, culminating with the front-month contract for crude ending at an all-time high of $61.89 a barrel Tuesday.
Over time, sustained higher oil prices cut into profits by raising the cost of doing business, as well as acting like a tax on consumers, chipping away at discretionary income.
Meanwhile, the dollar has rebounded this year, a factor that could be hurtful in particular to the earnings of multinational companies. A weaker dollar tends to make U.S. exports more competitive in other countries.
However, there were some encouraging factors that had nothing to do with energy per se.
Generally, margins -- a key measure of profitability -- didn't slow as quickly as had been anticipated, Silverblatt said, and sales were stronger, all of which added to the bottom line.
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