US companies begin reporting second-quarter earnings on Monday amid intense scrutiny from investors and analysts searching for reassurance that the economy is on track for a strong recovery.
The Nasdaq stock market has gained 24.6 per cent since the start of the year, and the S&P 500 index is 12 per cent higher.
But some market watchers believe the gains are backed up by only moderately encouraging economic data. Any earnings disappointments could do even more damage to fragile investor confidence.
Jack Caffrey, a US equity strategist at JP Morgan Private Bank, said investors needed more convincing that the economic recovery was real and sustained: "We'd really like to see [the recovery] happen rather than hearing rumours of its appearance, which is why people will pay lots of attention to the second quarter earnings."
Chuck Hill, director of research at Thomson First Call, said investors would be paying at least as much attention to companies' comments on the outlook for their industries as to what they said about actual earnings.
"That's always more important than reports on the prior quarter, but particularly so this time because we're at a critical hurdle on whether the second half numbers are going to hold up," he said.
When companies released their first-quarter earnings figures, most did not cut their estimates for the second half of the year. This fed a continued appetite for equities, and raised the stakes for earnings disappointments. "So the big question becomes: did we merely push the slashing back three months or are the numbers going to be real this time?" Mr Hill asked.
Investors are set to press US companies for more precise guidance than they have had so far. In the first quarter, many groups gave only the vaguest outlook, with comments heavy on "general feel" and light on specifics. It was not uncommon to see companies declining to give any hard figures, blaming the war in Iraq and the outbreak of Sars for an uncertain outlook.
Already that pattern looks set to continue. Companies as varied as Eastman Kodak, the New York Times, Texas Instruments and Motorola blamed Sars for what they warned would be a weak second quarter.
But despite the increased pressure for more specifics, some investors are sceptical that this will be the quarter when companies give an honest outlook.
The Nasdaq stock market has gained 24.6 per cent since the start of the year, and the S&P 500 index is 12 per cent higher.
But some market watchers believe the gains are backed up by only moderately encouraging economic data. Any earnings disappointments could do even more damage to fragile investor confidence.
Jack Caffrey, a US equity strategist at JP Morgan Private Bank, said investors needed more convincing that the economic recovery was real and sustained: "We'd really like to see [the recovery] happen rather than hearing rumours of its appearance, which is why people will pay lots of attention to the second quarter earnings."
Chuck Hill, director of research at Thomson First Call, said investors would be paying at least as much attention to companies' comments on the outlook for their industries as to what they said about actual earnings.
"That's always more important than reports on the prior quarter, but particularly so this time because we're at a critical hurdle on whether the second half numbers are going to hold up," he said.
When companies released their first-quarter earnings figures, most did not cut their estimates for the second half of the year. This fed a continued appetite for equities, and raised the stakes for earnings disappointments. "So the big question becomes: did we merely push the slashing back three months or are the numbers going to be real this time?" Mr Hill asked.
Investors are set to press US companies for more precise guidance than they have had so far. In the first quarter, many groups gave only the vaguest outlook, with comments heavy on "general feel" and light on specifics. It was not uncommon to see companies declining to give any hard figures, blaming the war in Iraq and the outbreak of Sars for an uncertain outlook.
Already that pattern looks set to continue. Companies as varied as Eastman Kodak, the New York Times, Texas Instruments and Motorola blamed Sars for what they warned would be a weak second quarter.
But despite the increased pressure for more specifics, some investors are sceptical that this will be the quarter when companies give an honest outlook.
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