Transcripts

Jittery June Ends Along With Optimism For The Third Quarter

SUSIE GHARIB: Investors say good riddance to June and to the second quarter. Despite eking out a small gain today, the Dow lost more than 7 percent in the second quarter and more than 10 percent this month. Concerns about record-high oil prices and struggling financial firms made for a jittery June. Now investors are hoping the third quarter will be better. But, as Suzanne Pratt reports, many experts are less optimistic.

SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: It was supposed to get much better for corporate America in the second half of this year. But, as Wall Street gears up to digest another bad quarter of corporate earnings, many investors are doubting that rosy outlook. Analysts predict second quarter earnings at S&P 500 companies dropped nearly 11 percent. If that's true, it will be the fourth straight quarter of declining profits for large cap U.S. firms. There are high hopes for a recovery in the second half, with analysts looking for S&P 500 profits to jump about 14 percent in the third quarter and nearly 60 percent in the fourth, partly because of easier comparisons. Still, Citigroup market strategist Tobias Levkovich says those numbers are simply too optimistic.

TOBIAS LEVKOVICH, CHIEF US STRATEGIST, CITI: Historically, there's been about a nine-month lag between credit condition changes and business condition changes. So if tight credit occurred starting last summer, it's going to be hitting us this summer and industrial companies aren't going to be fairing so well. Europe is slowing pretty significantly and that's going to have some impact.

PRATT: Experts say large cap U.S. firms are likely to face many of the same headwinds in the second half of this year that they experienced in the first half. Fallout from the sub-prime mortgage market crisis and the housing recession ranks at the top of the list. A look at expectations for financial earnings tells the story. That's because financials account for about a fifth of the companies in the S&P 500. At the beginning of April, analysts predicted a hefty 24 percent jump in third quarter profits for the financial sector. As the string of write-downs continued in the last few months, that number fell hard and fast. Today, analysts are looking for a meager 1 percent increase. The big fear among some investors is what happens to the broader market if those greatly reduced expectations fall even further. Wall Street veteran Jim Awad says it could create an excellent buying opportunity.

JAMES AWAD, CHAIRMAN, W.P. STEWART ASSET MANAGEMENT: History would suggest that if you buy the stocks of quality companies during periods of distress, you'll make money over the ensuing years. And I think the same is true this time. It's going to be a rough summer. But if you look back two or three years from now and you bought quality stocks while they were under pressure, you'll end up making money.

PRATT: Even though hopes are fading for a earnings recovery in the third quarter, experts are more upbeat about the fourth quarter. That's because they say typically it's a seasonally strong quarter for the U.S. economy. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.