Profit seasons are all about surprises, or the lack of them. In a booming market the wild card that sends investors rushing to buy is what analysts call "positive surprise" - a result that beats not just the consensus earnings estimate, but higher profit estimates, too.
In a developing bear market, the market-sensitive card is negative surprise: a result that misses the consensus by a larger than expected margin can and often does spark a sell-off.
And in a maturing bear market like this two-year-old one, what is needed is a Goldilocks result: no surprises.
The June half profit reporting season is, of course, going to show that profits retreated. Australian analysts are expecting an overall profit decline for the companies in the S&P/ASX 200 Index of about 20 per cent, and second-quarter profits for the 500 companies in the S&P 500 index in the US are expected to be down 36 per cent.
Companies everywhere will be reporting results that include one or more of the ingredients in the cocktail that has already crushed earnings and share prices: write-downs associated with declining asset values, declining revenue as demand drops, tightening operating profit margins, and higher debt and equity capital costs,
as loans are rationed and priced for scarcity, and as deeply discounted share issues fill funding gaps.
There will be shards of light. Retail turnover has been boosted by lower household debt servicing costs following the interest rate cuts, and by the Federal Government's fiscal spending packages, for example, and businesses selling needs as opposed to wants, including medical companies, telcos and utilities, which are less vulnerable in economic downturns.
Miners also booked better selling prices in the June half than they expected when the half began, amid reports that the global economy had hit the wall. A bounce in the oil price from about $US46 a barrel at January 1 and $US33.98 in mid-February to a high last month of $US72.68 will help the oil and gas producers.
But for any investor who has a long-term, balanced portfolio, there will be no escape.
The consensus estimate for the MSCI index of 1500 big, blue-chip stocks in 23 developed markets, including the companies that make up Australia's S&P/ASX 200 index, is that earnings will fall 12 per cent in calendar 2009, despite a 75 per cent bounce in financial company profits.
Energy company earnings are expected to be down 50 per cent, and mining and other materials companies are expected to post profits that are in aggregate 55 per cent lower.
Industrial company earnings are predicted to be down 29 per cent, and consumer discretionary groups are expected to report a 23 per cent profit slump. Earnings of the Global MSCI index companies outside the US are expected to be down 11 per cent this year, and the ASX 200 companies are expected to post a 15 per cent profit decline, with the heaviest hit occurring in the June half.
But there is now a pain horizon in the consensus profit forecasts. Forecasts for this year were slashed 45 per cent for the MSCI global stable and 35 per cent for the the ASX 200 companies, but since March this year, 2009 earnings forecasts for both groups have only been reduced by another 7 per cent.
The consensus forecast is that earnings growth will return next year, with profits rising 25 per cent in the case of the global MSCI stable and 8 per cent in this market.
The more sedate rise that is predicted here reflects the weight of the Australian banks - they account for more than a third of the market and will be booking consumer finance loan losses as unemployment rises - and also reflects the fact that Australian companies diluted earnings per share as they issued shares worth $88.1 billion in the year to June to repair their balance sheets.
The consensus estimate of a 25 per cent bounce in global earnings next year would still leave earnings 24 per cent below their 2007 peak, and it is not yet completely priced in.
October may have been a lifetime price-earnings low.
But if the global economy keeps improving and there are not too many negative surprises in the profit season (the estimate of Goldman Sachs is that two-thirds of companies here have a "neutral" earnings risk, while 21 per cent have a downside risk) the rally could hang together as investors buy into sectors including media, transport, building and technology that feed off an economic recovery.
