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Why Gloomy 2Q Earnings Outlook Might Not Be So Dim

By SCOTT MAYEROWITZ

NEW YORK (AP) â¿¿ For Corporate America, it's the season of low expectations.

Companies have been scaling back their earnings forecasts for weeks as part of a quarterly cat-and-mouse game with financial analysts. It's not OK just to report a strong second-quarter profit â¿¿ they also need to beat analysts' forecasts. And companies are eager to do just that.

Earnings season gets started Monday, when aluminum giant Alcoa Inc. reports results after the stock market close.

Wall Street analysts now predict that earnings for companies in the Standard & Poor's 500 rose 3 percent in the second quarter compared with a year earlier, according to a survey by S&P Capital IQ. But as recently as April 1, they thought earnings would rise nearly 7 percent. At the start of the year; they forecast a 9 percent increase. Companies that provide raw materials and technology firms are expected to drag down growth.

Another reason for the drop? Eighty seven of the 111 S&P 500 companies that offered guidance were negative.

"You really have to take it with a grain of salt," said Christine Short, associate director at S&P Capital IQ. Last quarter, she said, 65 percent of companies beat financial analysts' estimates.

Quarterly growth over the past 15 years has averaged 8 percent. In the last eight quarters, analysts' estimates have underplayed growth by about 4 percentage points, according to Short. That would mean earnings in the second quarter just ended are more likely to rise around 7 percent.

There are plenty of areas that could help lift corporate profits. Americans' confidence is up and they are willing to spend again. The housing market rebound is also expected to push up earnings of home construction companies such as DR Horton Inc., Lennar Corp. and PulteGroup Inc. The consumer discretionary sector, which includes retailers like Target Corp., entertainment companies like Walt Disney Co. and the homebuilders, is expected to see growth of 12 percent.

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