Those investors expecting a quick turnaround in corporate earnings may be in for a rude awakening, if a new survey is any gauge.

S&P 500 firms will end their slump, but not until the fourth quarter of this year, according to analysts surveyed by Bloomberg News.

The survey expects the earnings slump that has lasted six quarters to get worse before it gets better, with profits declining for three more quarters, Bloomberg News reported Monday. The survey estimated that S&P 500 profits will plunge 37 percent in Q1, on a year-over-year basis; then decline 31 percent and 18 percent in Q2 and Q3, respectively, before rising in Q4.

Q1 mood is subdued

The Q1 earnings season starts Tuesday with Dow Jones Industrial Average component Alcoa (AA), in keeping with Wall Street tradition, serving as the first Dow company to report. The First Call Q1 EPS estimate for Alcoa is -57 cents per share.

Vanden Boogard, who helps manage $60 billion at Victory Capital Management in Cleveland, is not expecting much from the quarter.

"This is a throwaway quarter -- everyone expects it to be bad," Boogard told Bloomberg News. "People will be looking forward to the commentary for guidance. It's all about the outlook."

Linda Duessel, equity market strategist at Federated Investors, concurred, arguing they'll be a small victory in the current earnings season if Q1 results are offset by guidance suggesting the worst of the earnings declines is over.

"What everybody is hanging their fundamental hopes on at the moment is the compilation of less-worse information," Duessel told The Wall Street Journal Monday (subscription required). "We want to hear that we fell off a cliff, and we're done falling, maybe."

Economic fundamentals are mixed

Further, don't look for recent macroeconomic data to provide incontrovertible evidence regarding the prospects for Q2 and Q3. The institutional bulls, who've had the upper hand in the stock market over the past month, point to decent-to-bullish recent reports on durable goods orders and new homes sales as signs the 16-month recession is coming to an end.

However, institutional bears argue that this is hardly the time for the bulls to exude confidence, not with rising U.S. unemployment simultaneously weighing on consumer demand and business investment, and with global credit markets just beginning to show signs of healing.

"Earnings expectations for most companies have been dramatically lowered over the last 90 days, a fact recognized in the drop in stock prices over the same period. The question is whether analysts have lowered expectations enough and whether companies meet or top the lowered performance bar," Frederick Dickson, chief market strategist at D.A. Davidson, told Marketwatch Monday.

Market Analysis: As noted, with the consensus expecting a very-poor-to-abysmal Q1, the unresolved question remains, "Do we begin to see the signs of earnings and economic recovery in Q2 and Q3?"

With the above in mind, a good shorthand for investor is: monitor the revenue/earnings guidance and economic outlook of major multinational corporations (MNC) to determine their thoughts on the state of the global and U.S. economies. Much of the recovery's growth will occur in emerging markets, hence if the MNCs see slack international demand for Q2 and Q3, that does not bode well for earnings recovery prior to Q4, and by extension, for the U.S. stock market.

Bellwether stocks to keep an eye on include: IBM (IBM), Caterpillar (CAT), Boeing (BA), General Electric (GE), United Technologies (UTX), Exxon-Mobil (XOM), Procter & Gamble (PG), FedEx (FDX), Oracle (ORCL), Hewlett-Packard (HPQ), Microsoft (MSFT), Intel (INTC), Coca-Cola (KO), and AT&T (T).

Don't just evaluate their earnings reports and guidance; identify what each company is saying about global and U.S. economic conditions, to get a better picture of likely consumer and business demand in the immediate quarters ahead.


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