Recovery? No. It's survival of the fittest

Strong earnings from Intel, Goldman and J&J may be signs that healthy companies are getting better -- but that's not the same thing as a broad rebound.

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By Paul R. La Monica, editor at large

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The Dow, S&P 500 and Nasdaq have all surged since early March, leading some market experts to wonder if investors are pricing in unreasonably high earnings expectations for the second quarter.

NEW YORK ( -- Hip hip hooray! It's corporate earnings season. And so far, the results are what Frosted Flakes pitchman (or is it pitchfeline?) Tony the Tiger would call Grrrrrrrrrreat!

Goldman Sachs (GS, Fortune 500) posted a profit that blew away analysts' estimates Tuesday morning. Diversified health care giant Johnson & Johnson (JNJ, Fortune 500) also beat Wall Street's consensus estimates that morning.

After the bell, semiconductor kingpin Intel (INTC, Fortune 500) reported better-than-expected earnings and issued healthy sales guidance for the third quarter, leading giddy investors to bid up its stock by 8% on Wednesday.

Intel's bullish forecast -- it expects sales to be in a range of $8.1 billion to $8.9 billion, well-ahead of forecasts of $7.8 billion -- helped boost the entire market Wednesday. The Dow, of which Intel is a member, was up 3%, while the tech-infused Nasdaq shot up more than 3.4%.

So can these strong results mean the worst may be over for the economy?

If the fortunes of big companies continue to improve, it stands to reason that these firms will eventually feel more comfortable investing in themselves. That could mean more hiring, which is sorely needed. Consumer spending is still what drives the U.S. economy and many consumers are likely to keep their wallets bolted shut until there are signs of an improving labor market.

Talkback: Are you encouraged by the stock market's rebound or worried that investors are missing the bigger picture? Leave your comments at the bottom of this story.

Unfortunately, it may be premature to declare an end to the downturn just because Goldman Sachs did a solid job of helping companies sell new debt offerings in the second quarter.

John Norris, managing director of wealth management with Oakworth Capital Bank in Birmingham, Ala., said that it would have been hard for Goldman to not do well.

After all, Goldman has emerged as one of the two last major independent investment banks standing on Wall Street (the other being Morgan Stanley (MS, Fortune 500)) following a shakeout that led to the fire sales of Bear Stearns and Merrill Lynch and collapse of Lehman Brothers.

Goldman also had some bad news in its report that does not bode well for other banks. The company took a $700 million hit due to losses tied to commercial real estate loans.

Many big commercial and regional banks will likely suffer due to declining credit quality in their real estate portfolios, said Bill Stone, chief investment strategist with PNC Wealth Management in Philadelphia. And these banks won't be able to rely on types of trading gains and fees tied to stock and debt issuance that Goldman generated to offset its credit losses.

"I hesitate to call Goldman's results a turn for the banking sector. It's too early, and Goldman is so different," Stone said. "If you're expecting blowout earnings from other financials like you had at Goldman, you're likely to be disappointed."

Still, there is some undeniably good news in the earnings reports that have been released so far. John Butters, director of U.S. earnings research Thomson Reuters, noted that of the S&P 500 companies that have already announced results, more than two-thirds of them have beat expectations.

Along those lines, there have even been some encouraging signs from companies in sectors that have been brutalized by the recession.

Newspaper publisher Gannett (GCI, Fortune 500), for example, reported a second-quarter profit Wednesday that was ahead of estimates. Shares of the beaten down media company shot up more than 20% on the news.

Heck, there was even "good" news from a beleaguered airline. AMR Corp (AMR, Fortune 500)., the parent of American Airlines, posted a narrower loss than expected Wednesday, lifting its stock 2% in late afternoon trading. (By the way, the novel "Dear American Airlines," by Jonathan Miles, written in the form of a letter by an angry stranded customer at O'Hare demanding a refund, is a very amusing read.)

Norris added that Intel's boosted sales guidance is a positive sign since it hints that demand for personal computers is stabilizing.

How long can 'less bad' be good enough?

But there is a difference between stabilization and recovery. And with the stock market up so much from March's lows, it appears investors won't be content with mere stabilization.

Plus, the fact that commercial lender CIT Group (CIT, Fortune 500) is flirting with failure is surely a sign that the worst may not be over just yet for financial companies.

"Investors are pricing in a sharp recovery and I'm not seeing anything out there that would make me believe that one is in the cards," Norris said. "It's hard to imagine a recovery scenario with the mess the financial system is still in."

Stone added that for many companies, beating expectations has been about reducing expenses, not actual increases in demand. Intel and J&J, for example, both reported sales in the second quarter that were lower than a year ago.

"Very few companies are showing revenue increases. A lot of earnings surprises are based on cost cutting. The tide is still going the wrong way," Stone said. "But I guess 'less bad' is good enough."

It all boils down to investors playing the classic game of caring more about earnings relative to estimates -- not absolute results.

Butters said that even with the strong start to the reporting period, profits for the S&P 500 companies are still expected to plunge 35.7% from a year ago. And earnings from the financial sector are expected to decline 52% from last year's second quarter, a period that wasn't exactly pretty for most big banks.

That hardly sounds like a recovery. It's just an example of corporate Darwinism -- the strong are surviving.

"This earnings season is not going to be a bloodbath, but the level of surprises we've seen so far may not continue. We've had some industry leaders that have reported. I'm interested to see how other companies do," Norris said.

Talkback: Are you encouraged by the stock market's rebound or worried that investors are missing the bigger picture about earnings and the economy?  To top of page

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