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Macro View

We are entering the last major reporting week of the second quarter earnings season. By the end of this week, the bulk of the second quarter earnings season will be behind us as by then we would have seen results from 401 companies in the S&P 500.

On the economic calendar, we have the July non-farm payroll report coming out on Friday, the Fed meeting on Wednesday, and a number of other major economic releases on deck, including the two ISM reports during the week.

Total earnings growth for the roughly 300 companies that have already reported results are up 5.5% from the same period last year, with about two-thirds of them beating expectations with a median surprise of 2.8%. This is weaker than what these same companies did in the first quarter, but it is significantly better relative to pre-season expectations.

But don’t let the not-too-bad aggregate earnings growth picture distract you from the fact that pretty much all of the growth is due to easy comparisons for the Finance sector in general and Bank of America (BAC - Analyst Report) in particular. Strip out Finance, the positive earnings growth of 5.5% becomes a decline of 1.5% instead.

What is even more notable is the broad-based top-line weakness. Total revenues for the roughly 300 companies in the S&P 500 that have reported results already are flat from the period last year. Strikingly, only 36.6% of the companies have beaten revenue expectations and even many of these ‘revenue beaters’ have guided towards lower revenue numbers in the current period. It appears that the synchronized global economic slowdown is making it difficult for companies to achieve top-line growth.

We will know more about the domestic economic picture this week after the jobs and ISM reports, but the picture emerging from last week's GDP report is not very inspiring. This does not bode well for earnings growth in the coming quarters, which have steadily been coming down. But even as earnings expectations for full-year 2012 have been coming down, we haven’t the same level of downward adjustment for earnings expectations for 2013, which still shows growth in the low double digits. It is hard to envision those expectations holding up given all the negative cross-currents.

The market will most likely be unable to hold its ground in the absence of earnings strength and a lackluster economic backdrop. Expectations of monetary easing from the Fed and the European Central Bank may improve risk appetites to some extent, but central banks’ abilities to reverse the economic slide is limited given the issues confronting the regions on both sides of the Atlantic. Bottom line, the going is expected to get only tougher for the market going forward.

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