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Earnings likely to disappoint in second quarter

June 29, 2012: 9:25 AM ET

There goes the one thing this recovery had going for it.

Earnings growth of S&P 500 (compared to a year ago)

FORTUNE -- The recovery might soon hit its time limit.

One of the biggest disconnects of the recent rebound is the fact that while corporate profits have surged, hiring has remained weak. Executives have said uncertainty has kept them from adding workers. But the assumption was that eventually sidelined workers would be snapped up by corporations awash in a rising amount of cash. But those waiting for earnings growth to spur a hiring rebound might have run out of time.

In the past month, analysts have cut their expectations for earnings growth for the second quarter in half. Stock researchers are now predicting profits of companies in the Standard & Poor's 500 to rise 3.2% on average in the second quarter, down from an expectation of 6.4% a month ago.

MORE: Why I'm betting on Europe

And even the lower growth estimate may be weaker than it appears. On Thursday, the Bureau of Labor Statistics said its broader measure of corporate profits, which includes private companies as well as public ones, fell in the first quarter for the first time since the end of the recession, down a slight 0.3%.

For the narrower S&P 500, which just tracks large publicly traded companies, a good portion of the expected rise in earnings appears to be coming solely from the financial sector. For instance, exclude one company from the group, Bank of America, and that wipes out all of the growth of the S&P 500 in the second quarter and then some. Without Bank of America, profits in the S&P 500 are expected to drop 1.5%.

Already, executives at a number of big companies, included Procter & Gamble, have said that profits will be lower than expected. The economy, in part because of problems in Europe, appears to have slowed significantly in the second three months of the year. So far, 75% of the companies that have pre-announced earnings for the second quarter have said that their bottom lines will be lower than expected, according to market data firm FactSet. That's higher than typical. On average, over the past five years, negative pre-announcements have averaged 60%.

MORE: Wall Street still ignoring the fiscal cliff

But the biggest earnings disappointment could still be to come. Amazingly, analysts are still expecting that profits will shoot up again later this year, refueling the rebound. Estimates are for S&P 500 earnings to jump 13.5% in the fourth quarter. But after this quarter, it's likely that analysts will finally realize that at least for now, the current rebound appears to have run out of gas.

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About This Author
Stephen Gandel
Stephen Gandel

Stephen Gandel has covered Wall Street and investing for over 15 years. He joins Fortune from sister publication TIME, where he was a senior business writer and lead blogger for The Curious Capitalist. He has also held positions at Money and Crain's New York Business. Stephen is a four-time winner of the Henry R. Luce Award. His work has also been recognized by the National Association of Real Estate Editors, the New York State Society of CPA and the Association of Area Business Publications. He is a graduate of Washington University, and lives in Brooklyn with his wife and two children.

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