Earnings Data Offer Investors Mixed Signals

Investors are getting used to mixed signals about the health of the economy from Federal Reserve Chairman Alan Greenspan and from government data.

And as the second-quarter earnings reporting season enters its busiest stretch, the signs from corporate America aren’t much clearer.

Overall, results from companies that have reported so far have been better than expected, data show. But many firms have issued cautious guidance for the second half of the year -- which may be a key reason the stock market has sputtered in recent weeks.

Of 158 companies in the blue-chip Standard & Poor’s 500 index that have reported second-quarter earnings, 104 have beaten analysts’ expectations and 20 have fallen short, according to data tracker Thomson First Call in Boston. Thirty-four companies have matched expectations.

Those figures are for operating earnings, meaning they exclude one-time gains and losses.

Last week, Ford Motor Co. reported net income of 22 cents a share for the second quarter, beating analysts’ average estimate of 19 cents. But the company also warned that it would have a bigger-than-expected loss in the current quarter.

IBM Corp. last week reported a second-quarter operating profit that matched analysts’ expectations, but the company sounded uninspiring about the second half. “It’s a tough market out there,” IBM’s chief financial officer, John Joyce, said during a conference call.

Chuck Hill, Thomson First Call’s director of research, said caution seems to be a common view from the executive suite.

“Guidance has been more of the same: ‘Things are meandering along.’ The tone is just not that good if we’re going to have a big earnings pickup in the second half,” Hill said.

A big pickup is what Wall Street still expects: Based on analysts’ estimates, operating earnings for the S&P; 500 companies are projected to rise 6.7% in the second quarter year-over-year, then 13.7% in the third quarter and 21.2% in the fourth, according to Thomson First Call data.

The third- and fourth-quarter S&P; estimates generally have held steady or increased in recent weeks, Hill said. For the third quarter, for example, the consensus estimate was 12.7% as of June 30.

“The question,” Hill said, “is whether companies are soft-pedaling [the second-half outlook] because they want to be absolutely sure before they say things are getting better -- or whether the analysts are looking through rose-colored glasses and ignoring the problems.”

That’s a question investors appear to be grappling with too. The S&P; 500 rocketed 26% from March 11 to June 17 but has eased 1.8% since, including last week’s 0.5% decline, to 993.32 as of Friday.

The technology-dominated Nasdaq composite peaked at 1,754.82 last Monday but sank to 1,708.50 by Friday, down 1.5% from the preceding week’s close.

“The market may have gotten ahead of itself, especially the tech stocks,” said Chris Orndorff, head of equities at L.A.-based money manager Payden & Rygel. “Yes, capital spending has stopped declining, but it has not advanced yet in the way that stocks have priced in.”

One issue is the “quality” of earnings in the second quarter. Some companies are reporting stronger profits, but from continued cost cutting rather than from higher sales. That isn’t viewed as sustainable.

In the tech sector, for example, analysts expect second-quarter earnings growth of 18% but revenue improvement of just 4%, according to Thomson.

Still, there have been some surprisingly upbeat profit reports in the last two weeks. On Friday, Santa Clara, Calif.-based networking gear maker Extreme Networks Inc. said sales would rise more than expected this year, sending its stock up $1.10 to $5.77.

Also Friday, videoconferencing-equipment maker Polycom Inc., based in Pleasanton, Calif., rallied $1.76 to $15.42 after its second-quarter earnings topped analysts’ consensus estimate, and the firm said more companies appeared to be willing to ratchet up their capital spending.

In the industrial sector, heavy-equipment makers including Caterpillar Inc. and Ingersoll-Rand Co. last week reported stronger-than-expected second-quarter profit and hefty revenue gains, pushing their stocks up sharply.

Demand for those and other old-line industrial shares helped drive the Dow Jones industrial average up 0.8% last week, to 9,188.15 by Friday, even as Nasdaq fell.

Analysts have been expecting weak results from the industrial sector this year, especially compared with technology. The results from Caterpillar and Ingersoll-Rand, and their stocks’ responses, hint that investors could be pleasantly surprised by that sector.

Overall, the improving bottom line has underpinned the stock market this year, analysts say. With the expected second-quarter growth in earnings, the S&P; 500 companies would record their fifth straight quarter of rising results.

The Dow is up 10.2% this year, while the S&P; 500 is up 12.9% and the Nasdaq composite has surged 27.9%.

This week, 165 companies in the S&P; index are slated to issue earnings reports, along with hundreds of other names.

Among the reports that will be closely watched:

* 3M Co. and Merck & Co. on Monday.

* United Parcel Service Inc., RadioShack Corp., Ecolab Inc. and Amazon.com Inc. on Tuesday.

* Eastman Kodak Co., Boeing Co. and Anheuser-Busch Cos. on Wednesday.

* International Paper Co., SBC Communications Inc., AT&T; Corp., Whirlpool Corp. and EBay Inc. on Thursday.

As during the last two weeks, Orndorff said he would be interested in the comments, rather than just the numbers, from companies such as UPS, Anheuser-Busch and Ecolab, which provides industrial cleaning products and services.

“We’re going to watch what they’re saying about the economy,” he said. “The ground-level view can be telling.”

Bloomberg News was used in compiling this report.