Marc Pado Comments: U.S. Profits Look Strong, But Doubts Vex Investors

July 8, 2010, Reuters

U.S. earnings could be strong enough to get stocks out of their funk, but with the outlook uncertain, investors are still positioned cautiously.

Estimates for S&P 500 companies have risen since the start of the year, but the drumbeat of lackluster data has been the overriding focus for investors worried that slowed growth could eventually hit corporate profits. "There's a disconnect between the expected profit growth that's printed and the market's pricing," said Nick Kalivas, senior equity index analyst at MF Global in Chicago.

This divergence suggests Wall Street is at a crossroads. With stocks considered cheap, markets could be set for a pop if earnings surprise to the upside. But if chief executives give cautious guidance for the rest of the year, the bears worried about a double-dip recession might become more entrenched. "There is this opportunity that if earnings season is decent, people will believe the value story and they'll bring some money back into the market," said Kalivas.

The worry, analysts say, is that results from Nike Inc and FedEx Corp in June could be a prelude for the earnings season to come. The companies reported fourth-quarter profit that matched or beat the Street's view but gave disappointing outlooks, and the stocks were hit hard. Bullish investors got a bit of a cheer on Wednesday. Stocks saw their best day in more than a month after custody bank State Street Corp forecast quarterly operating earnings would surpass expectations.

"When you look at how the market's traded, you don't get the impression the market has been discounting a strong quarter by any means," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co. in San Francisco.

"Hopefully, when earnings come out, there are some surprises out there because I don't think the market thinks there's any hope for good news."