Earnings deja vu

Alcoa and GE will kick off second-quarter earnings season this week. And overall growth will probably look a lot like the first quarter. That's not good.

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By Paul R. La Monica, CNNMoney.com editor at large


NEW YORK (CNNMoney.com) -- Alcoa and General Electric set the tone for a disappointing first-quarter earnings period back in April when both reported worse-than-expected results.

And Wall Street is expecting a repeat performance from the two Dow components when they kick off a round of second-quarter results this week.

Alcoa (AA, Fortune 500) is taking a hit because of high commodity prices and weakening demand. The aluminum producer is expected to report earnings of 68 cents a share, down 19% from 81 cents a share a year ago. Analysts are forecasting a sales decline of 9% to $7.4 billion. Alcoa will report its results Tuesday afternoon.

Then there's General Electric (GE, Fortune 500), which historically has provided investors with dependable double-digit earnings growth. It is also struggling because of the sluggish economy.

GE's profits are expected to be roughly flat - earnings per share of 54 cents versus 53 cents a year ago. GE will report its numbers Friday morning.

Overall, the second-quarter results for Corporate America should look remarkably like the first quarter. According to Thomson Reuters, profits for the S&P 500 are expected to be down 12% from a year ago.

But the earnings decline is due entirely to the weak results in the financial sector. With Citigroup (C, Fortune 500), Merrill Lynch (MER, Fortune 500) and Washington Mutual (WM, Fortune 500) expected to report losses in the second quarter, analysts are forecasting a 66% drop in earnings from financials.

If you exclude the financial sector, earnings are actually expected to be up 9% in the second quarter.

Still, that number isn't really a true reflection of profit growth either. Just as financials are dragging down overall profits, energy companies are having an oversized effect.

Energy companies are forecast to report a 28% jump in profits in the second quarter, according to Thomson Reuters. So if you exclude both the extreme bad (banks) and the extreme good (oil), what you're left with is a hardly inspiring 3.6% growth rate for the rest of the market.

"You would have growth but it is not spectacular by any means," said John Butters, director of U.S. earnings research for Thomson Reuters.

What's more, these numbers might be overly optimistic. Butters notes that earnings forecasts for every sector except energy have been reduced since the start of the second quarter in April.

Back on April 1, analysts were expecting only a 2% decline in profits for the S&P 500 since the forecast at that time was for a 31% - not 66% - decrease in financial earnings.

"It should be no surprise that numbers have come down for all sectors except energy and that most of the downward revisions are in financials," Butters said. "It's a repeat of what we saw in the past few quarters."

Beyond the absolute best and worst, the other major area of weakness is the consumer discretionary sector, which is expected to post a 18% decline in profits due to poor results from auto manufacturers GM (GM, Fortune 500) and Ford (F, Fortune 500) as well as homebuilders.

And the only other sector besides energy expected to report decent profit growth in the quarter is technology, thanks largely to forecasts of healthy growth from multinational giants like IBM (IBM, Fortune 500) and Apple (AAPL, Fortune 500). Analysts are predicting an earnings increase of 18% for the tech sector.

The remaining six sectors - consumer staples, telecom, utilities, industrials, materials and healthcare - are all expected to report annual profit growth in the single-digit range.

Of course, investors will be paying as much attention, if not more, to guidance for the second half of the year. Butters says that so far, analysts are expecting a rosier third and fourth quarter for companies due largely to easy comparisons to the end of last year, when the credit crisis was first starting to hurt financial earnings.

Nonetheless, he said that he doesn't foresee a return to healthy, sustainable profit growth until the worst of the credit crunch and housing meltdown are truly behind us and energy prices retreat from record levels. Until then, investors should probably brace for more underwhelming results.

"There are three key questions that will determine when profits come back. When will writedowns subside? When will see a rebound in homebuilding? And when will see oil prices come down?" he said.

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