Transcripts

What's Ahead for the Third Quarter?

PAUL KANGAS: Stocks closed out this last day of the quarter on a down note, but the major averages posted strong performances for the three months between March and June. The Dow, the Standard & Poor's 500 and the NASDAQ all saw double digit percentage gains. Now the question is what will drive the markets in the coming quarter? It could depend on corporate earnings reports and what CEOs say about how their businesses will perform the rest of this year. Erika Miller has a preview of what to expect.

ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Make no mistake, second quarter earnings will hurt. But in an interesting twist, the General Motors bankruptcy will ease the pain. GM was removed from the S&P 500 index earlier this month after filing . Its absence will remove a roughly 3 percent drag on earnings for the index. But don't be fooled. As UBS' Mike Ryan points out, most companies are still feeling fallout from the recession.

MIKE RYAN, CHIEF INVESTMENT STRATEGIST, UBS WEALTH MANAGEMENT: You've seen a tremendous loss in profits. So, what we're seeing now is that while companies are in recovery mode and that we do expect to see a stabilization in the earnings outlook, don't expect to see earnings bounce back sharply.

MILLER: Wall Street is bracing for a 35 percent slide in second quarter earnings, identical to the first. It will mark the eighth straight period of profit declines. But the news isn't all bad. Wall Street analysts have been raising second quarter earnings estimates not lowering them. So there's hope profits might come in better than expected. But the market is interested in more than just headline numbers. Where the profits come from also matters.

RYAN: We need to see some evidence that this process of simply cost reduction and efficiency gains, that that's winding its course and that we start to see some genuine improvements in the overall revenue cycle.

MILLER: Another question is whether consumer spending is picking up. So earnings from retailers, housing and autos will be examined more closely than other industries. Market strategist Tobias Levkovich says he's focusing on what companies say about the second half.

TOBIAS LEVKOVICH, CHIEF US EQUITY STRATEGIST, CITI: I think you are going to probably start to hear hints of increased production trends. Companies that had been cutting their production so severely to reduce inventory can actually start to lift production and by the way continue to reduce inventory but at a more moderate pace.

MILLER: Call it the show me stage for the market. It's no longer enough to see that earnings are not getting worse. Now investors want proof that business is actually getting better. Erika Miller, NIGHTLY BUSINESS REPORT, New York.