GM and Merrill fail to lift gloom

HEALTHY profits reported by General Motors and Merrill Lynch could be the exception and not the rule for Wall Street's second-quarter earnings season, which has just got under way.

After optimistically predicting a return to decent earnings growth in the second quarter, analysts now believe major companies in the Standard & Poor's 500 index will post a 1% or 2% profit advance on average. That's better than the previous five quarters of sharp decline but nothing like the revival that was expected before the accounting scandal exploded on Wall Street.

Investors cannot wait to see the back of a quarter marred by corporate misconduct and a generally weak economy.

'The end demand just wasn't there to lift profits,' says Joe Cooper, analyst with First Call, the Boston-based earnings tracking company. 'Add the fact that companies are going to be more conservative in their accounting and it doesn't look good.'

The majority of America's bigname firms will report earnings in the next fortnight for the quarter ended 30 June. Some, particularly in energy, are expected to be hammered, with net earnings dropping 42%, in part because of soft demand but also because of renewed attention to generally accepted accounting procedures. Several such companies are being investigated for 'pumping' earnings in the wake of Enron's collapse.

Consumer cyclicals will be a bright spot, analysts say. The sector, which includes automakers and retailers, is expected to post the best gains of 32%.

Companies that outperform rivals are likely to do so because of attention to cost cutting. Investment bank Merrill Lynch, led by David Komansky, posted a double-digit profit rise, despite sinking revenue, by streamlining.

On the positive side, an improvement in the tone of forward-looking forecasts has buoyed hopes the third quarter will see a double-digit rebound in profits - the first since early 2000. The current forecast is for a 16% year-on-year rise in those three months.

Merrill chief economist Bruce Steinberg says key indicators suggest a profit rebound is under way, pointing to climbing prices at the industrial level as a reliable barometer of rising profitability.

'The companies that have reported so far have come in stronger than expected,' Steinberg recently told Merrill clients. 'And a powerful leading indicator of earnings is pointing up - the core Producer Price Index is up 6.7% from a year ago, the strongest performance in two years.'