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Earnings Season Will Be Ugly … AGAIN

While stocks have made a roaring run during the past year or so, the fundamentals behind many companies have not been as impressive.

Specifically, earnings have managed to squeak higher, but sales have lost steam.

Looking ahead to the current earnings season, with Alcoa (AA) kicking things off on Monday, it could get ugly as even the bottom line starts to erode.

If that happens, it could be a very rough road ahead for the market.

Consider this June Earnings Scorecard from FactSet, which covered all but six companies in the S&P 500. While 70% topped estimates in Q1 numbers, only 46% reported revenues above the mean target.

Or look at this gem from the folks at FactSet:

During the second quarter, analysts reduced the projected earnings for the S&P 500 (based on the bottom-up EPS estimate) by 3.7%, which was below the 5-year (-6.4%) and 10-year (-4.2%) averages for a quarter. At the same time, a record high number (87) of companies have issued negative EPS guidance for Q2.

Uh oh.

Also check out this chart of “earnings squiggles” from economist Ed Yardini. As you’ll note, forward estimates have been moving down steadily.

earningssquiggles

Then there’s this, from another FactSet report last week:

“The estimated earnings growth rate for the S&P 500 overall for Q2 2013 is 0.8% this week, slightly below last week’s growth rate of 0.9%. On March 31, the Q2 earnings growth rate for the index was 4.2%. Eight of the ten sectors have witnessed a decline in earnings growth rates since that date, led by the Materials, Information Technology, and Industrials sectors. Only the Financials and Utilities sectors have seen increases in expected earnings growth rates since the start of the quarter.

If the final earnings growth rate for the quarter is 0.9%, it will mark the third consecutive quarter of growth for the index. However, only four of the ten sectors are projected to report an earnings increase for the quarter, led by the Financials (17.0%) and Telecom Services (10.2%) sectors. On the other hand, the Materials (-7.0%) and Information Technology (-6.5%) sectors are predicted to see the lowest earnings growth. The estimated revenue growth rate for the index for Q2 is 1.2%, down from an estimate of 2.7% at the start of the quarter.”

In short, earnings growth continues to slow overall and the majority of sectors are set to lose ground. Without telecom and financials, we’d be in deep contraction mode.

Keep all this in mind as Alcoa reports earnings next week. Because the continued narrative of top-line pressure and weak earnings growth could shake up an already rattled market this July.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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