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Execs’ outlooks will set the tone

It’s a simple matter in our capitalist economy to explain why so many people have lost their jobs in recent months: Companies have been desperate to slash costs to protect what’s left of their bottom line.

When profit is under siege, labor -- most companies’ biggest expense -- inevitably takes the hit.

As first-quarter earnings reports roll out in the next few weeks, the numbers are expected to be disastrous.

Wall Street already knows as much. The stock market rally of the last few weeks hasn’t been based on hopes for a first-quarter earnings miracle. Rather, investors mostly are counting on companies to offer some relatively upbeat comments about the future -- or, at a minimum, to sound less dire.

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If corporate chiefs believe we’ve seen the worst of this recession, they may be less inclined to keep hacking payrolls at the first quarter’s brutal pace. In turn, if Americans begin to feel a little more secure in their jobs, they may begin to feel more secure about spending money too.

That’s the “virtuous circle” required to stop a recession: Optimism feeds on itself in a recovery, just as pessimism feeds on itself in a downturn.

If executives need to show some justification for the level of job cuts in the last three months, earnings reports for the period ought to provide them with cover -- at least in shareholders’ eyes.

Total operating earnings of the Standard & Poor’s 500 companies, the nation’s premier firms, will be down nearly 37% from a year earlier, according to analysts’ estimates compiled by earnings tracker Thomson Reuters.

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That actually would be an improvement from the fourth quarter, when operating earnings for the S&P; 500 overall were in the red. But the fourth-quarter results were heavily skewed by massive losses at banks and other financial companies in the index.

First-quarter earnings are expected to show how broad and deep the recession became in the last three months: All 10 major industry sectors in the S&P; are expected to post declines in operating earnings compared with a year earlier.

Even companies whose businesses normally are resistant to downturns have found themselves struggling to sustain earnings.

The healthcare sector of the S&P; index, for example, is expected to see overall operating profit slip 3% from a year earlier. By contrast, the industry’s results were up 11% in the fourth quarter.

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Producers of so-called consumer staples, such as packaged food and toiletries, are on track for a 7% drop in profit, after posting a 5% year-over-year gain in the fourth quarter, according to Thomson Reuters.

The numbers will look far worse for industries whose fortunes always swing with the economy. The energy sector’s results are expected to plunge 57%, for example. Industrial companies’ earnings will be down 40% overall, if analysts’ estimates are on target.

And that’s the risk: For the previous six quarters, as earnings slumped, analysts repeatedly underestimated how weak results would be.

That was particularly true for the financial sector. The Wall Street analysts who were covering their own industry either had no clue what was going on or sought to put the best face on it. Overly optimistic earnings projections for banks no doubt kept many shareholders from bailing early. Hanging on to the stocks has cost investors dearly.

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At some point, chastened analysts should begin to be overly pessimistic about earnings. When companies begin to beat Wall Street’s quarterly estimates, that’s a good excuse for higher stock prices.

Are we there yet?

With the S&P; 500 index up almost 25% from its 12-year low reached March 9, the market’s mood has improved significantly. Many investors clearly are receptive to any shred of good news.

Case in point: Research in Motion Ltd., which makes the BlackBerry e-mail and phone device, late Thursday reported higher-than-expected fiscal fourth-quarter results and -- more important -- said results in the current quarter also would beat analysts’ forecasts.

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RIM estimated that earnings this quarter would be in the range of 88 cents to 97 cents a share. Analysts’ mean estimate had been 82 cents.

The company’s stock soared $10.20, or 21%, to $59.29 on Friday, its highest closing price since October.

In many battered industries, companies will have no shot at the kind of estimate-topping results that RIM projected. Still, there’s a possibility that firms slashed costs so deeply in the first quarter, their results will be less horrid than the market now expects.

More important, though, is what managements say about the future.

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At the beginning of this year, things were so bad that some companies stopped making any predictions about 2009 results. But in recent weeks, some data have offered hope that the economy’s rate of decline has slowed. On Thursday, the government reported that factory orders rose 1.8% in February, the first increase in seven months.

What’s more, “Credit market conditions have improved pretty dramatically” since December, notes Michael Darda, economist at MKM Partners in Greenwich, Conn.

In some cases, if companies at least offer visibility about this year’s earnings, “That would be taken as a positive,” said Larry Adam, investment strategist at Deutsche Bank Private Wealth Management.

The risk is that many executives will be too afraid to utter anything even remotely optimistic, for fear that the economy could sink deeper into recession this spring.

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With some tentative “green shoots” appearing in the ravaged economy, the question is whether first-quarter earnings reports will nurture those shoots, or trample them.

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tom.petruno@latimes.com


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