By Caroline Valetkevitch
NEW YORK (Reuters) - With analysts' expectations for second-quarter U.S. earnings at rock-bottom levels, many companies may well beat forecasts, possibly setting up the stock market for gains in the coming weeks.
Analysts' estimates for second-quarter U.S. earnings have been dialed down sharply since the start of the year, amid concerns a strong dollar will crimp the profits of U.S. multinationals and expectations energy company earnings will drop for a third straight quarter because of low oil prices.
With Alcoa set to kick off results season next week, investors are eyeing a 3-percent projected drop in benchmark S&P 500 earnings from a year ago, which would be the first profit decline since the third quarter of 2009, according to Thomson Reuters data.
However, a similarly dismal forecast from analysts for first-quarter earnings proved overly pessimistic, and S&P 500 companies ended up with a profit gain of 2.2 percent.
That's persuaded some strategists to expect similar good news in some sectors in the second quarter, which may well provide a boost to Wall Street.
"If profits surprise to the upside, which is what I think they're going to do, that is basically going to convince people we don't have a negative growth problem, that things are better than feared, and that should be positive for stocks," said Jonathan Golub, chief U.S. market strategist for RBC Capital Markets in New York.
Golub added he expects "massive beats" again in the energy sector in the second quarter, mirroring a pattern seen in the first.
Excluding the energy sector, S&P 500 earnings are expected to be up 4.9 percent from a year ago.
GREEK DRAMA
The second-quarter profit picture has also been overshadowed by concerns about the debt crisis in Greece, which has driven recent losses in stocks. The S&P 500 is down about 1.5 percent since the June 19 close, and all three major indexes registered losses for last month.
Those developments will likely keep investors on edge about results from U.S. companies with considerable exposure to Europe, such as McDonald's.
U.S. companies themselves have offered dismal outlooks for earnings, with negative forecasts for the second quarter outpacing positive ones by a ratio of 4-to-1, compared with 5.7- to-1 in the first quarter, according Thomson Reuters.
Those grim expectations have been blamed on the impact of a strong greenback, even though a U.S. dollar index declined 2.9 percent in the second quarter, following a 9 percent jump in the first. A stronger dollar makes it harder for U.S. companies to compete overseas.
"I think FX (foreign exchange) has been more of a headwind than we anticipated," AutoDesk Chief Executive Carl Bass said in a May 19 conference call with analysts.
A weak forecast from Micron Technology last week raised concerns about the outlook for the chip sector, which has been underperforming the broader market. A semiconductor index lost 8.7 percent in June, more than four times the S&P 500's 2.1 percent fall.
"We're cautiously optimistic. These guys aren't going to come into a number and know they're going to miss by a huge margin," said Daniel Morgan, senior portfolio manager at Atlanta-based Synovus Trust Company, whose top tech holdings include Intel.
Tech companies have issued more negative outlooks than any other S&P sector, or 24 out of 97 so far from S&P 500 companies.
At the same time, financials are projected to enjoy a 14.8 percent jump in year-over-year earnings, the biggest of any sector, thanks largely to Citigroup, whose results a year ago were hurt by steep litigation charges.
Energy companies in the S&P 500 are forecast to have the biggest drop in profits by far from a year ago, by 63 percent, similar to declines projected for the first quarter, Thomson Reuters data showed.
Even then, Golub and other strategists said the ultra-low forecasts just mean companies have an easier bar to beat.
"There's some stability in the second quarter with the dollar and oil, so maybe there's going to be a positive surprise for multinationals and the energy sector," said Mark Kepner, managing director, sales and trading at Themis Trading in Chatham, New Jersey.
(Additional reporting by Noel Randewich and Sinead Carew; Editing by Linda Stern and Bernadette Baum)
