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Earnings Warnings Threaten Double-Dip Summer – Wall Street

This article was posted on Jun 17, 2010 and is filed under Market News

Commentary: Focus to shift from Europe in July

Add earnings warnings and lower estimates to the widening mess of oil spillage, BP PLC’s fight for its life and Europe’s debt crisis this summer.

Concerns about the impact on corporate profits from things like the weak euro and suddenly nervous consumers started to dribble out with a warning from McDonald’s Corp. last week, and have quickly spread in the past few days to companies such as Best Buy Co. Federal Express Co. (NYSE: FDX – News) and Nokia Corp. ).

While still dwarfed by the emerging death watch on BP and worries that Spain may need to tap the Europe bailout fund, each warning, estimate cut, or negative growth projection over the coming days leading to the end of the quarter in two weeks will add a brick to the soaring wall of worry currently in the markets.

The recent spate of big gains in stocks has been fun to watch, but tempered by plenty of down days as well. The Dow Jones Industrial Average is still 700 points below its April highs and even after Tuesday’s run is only about where it was a month ago. Absent any June surprise, the path of least resistance for the markets looks lower over the next month, given the list of obstacles they face.

The end of the second quarter also marks the beginning of mid-year earnings season in Europe, so there will be little help from the banks and manufacturers on the continent and in the U.K. in terms of positive news. With the jury still out on Greece, and now Spain, it’s unlikely any European banks will be solidly forecasting great second halves. As I’ve said before, Greece is Bear Stearns in the scenario of the next financial crisis, while Spain represents Lehman Brothers. It must be saved at all costs. The European Central Bank and European leaders know this.

But assuming Europe slides along into the dog days of its summer, and anxious traders get to take those month-long holidays to St. Tropez and Monte Carlo, the battleground for investor sentiment should shift back to Wall Street in late July.

Earnings were strong in the first quarter, and any indication that they slipped in the second quarter will be taken as validation of the predictive nature of the stock market’s April and May swoon. A series of negative outlooks for the second half of the year could continue to hit stocks through July, especially into the market’s historically awful month of August. A rebound in the fourth quarter would probably then be justified as the market looks into 2011.

Investors should expect little from the G20 meetings in Toronto late next week, as the U.S.’s plan to show up with a neatly trimmed financial reform package will likely be greeted with indecision or, at best, a vague waffling of support. That debate is nowhere near over.

Bulls can take some solace in the fact that there are a few potential events out there that could trigger a renewed thrust in investor optimism. A Goldman Sachs Group (NYSE: GS – News) settlement with the Securities and Exchange Commission, for one, would light a fire under the banks and take the sting out of financial reform.

Any real progress in plugging the oil spill would also be a milestone from which bulls could begin building back their case. A surprisingly positive unemployment and payrolls report in two weeks might also help, though at this juncture it would take something outrageously good to wrench the Federal Reserve Board from its stubborn and ill-fated plan to keep interest rates at historic lows through the rest of the year.

Absent any of those events, however, earnings and the threat of a double-dip recession are the next big turn of focus for investors and for Wall Street. And the potential for stocks to ignore the signs for what could be a tough July of bad corporate news slips with each passing day.

David Callaway is editor-in-chief of MarketWatch.
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source: Yahoo finance

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