NEW YORK (Reuters) - If the stock market bulls are right, U.S. third-quarter corporate earnings could show revenue kicked into gear after some disappointing numbers last quarter. And if that happens, it could sustain the rally.
As the reporting period approaches, analysts said economic growth in the quarter could lift companies’ sales in contrast to the previous quarter, when revenue lagged bottom-line earnings.
“The key is revenue. I think (it) will surprise. It will grow from the second quarter along with GDP, and I think that’s what investors are going to focus on,” said Jeff Kleintop, chief market strategist at LPL Financial in Boston.
Hopes the economy was stabilizing and an improved outlook for earnings helped propel the Standard & Poor’s 500 Index up as much as 60 percent from March through last week, but analysts say an improvement in revenue is needed to sustain those gains.
Companies also should start issuing outlooks for next year, and those will be closely watched as well, analysts said.
The lack of revenue growth has come as consumers grapple with the highest jobless rate in 26 years and banks’ reluctance to lend money, even though the second quarter was expected to mark the last one of declines in output for the U.S. economy since it fell into a recession at 2007’s end.
Weak economic data, including Friday’s Labor Department report showing far more job losses than expected in September, added this week to recent doubts about the recovery’s strength.
“The third quarter is going to be very telling,” said Howard Silverblatt, an analyst at Standard & Poor’s in New York. “We need to see we are holding the path, going according to plan.”
The third quarter was a strong one for the U.S. stock market. Both the Dow Jones industrial average and the S&P 500 gained 15 percent from the previous quarter, thanks in large part to a boost in investors’ optimism due to better-than-expected second-quarter earnings.
More than 70 percent of S&P 500 companies beat expectations in the quarter, well above the 61 percent average for a typical quarter, but analysts said it was mainly the result of heavy cost-cutting and not revenue growth.
The third-quarter earnings season will kick off with results from Alcoa Inc on Wednesday after the closing bell.
On Friday, stocks finished off a second straight week of losses, with some analysts predicting a further pullback. Despite those back-to-back weekly declines, the S&P 500 is still up 51 percent from its early March low.
Based on the latest available earnings estimates, though, revenue, like income, should improve from the second quarter, though it will still be down year over year.
“We might start seeing some top-line growth in the third, and certainly in the fourth, quarter as in our view, the economy has turned and the recovery is well in place,” said Henry Smith, chief investment officer of Haverford Trust Co. in Philadelphia.
Thomson Reuters’ data shows S&P 500 third-quarter earnings declining 24.8 percent from a year ago, compared with the second-quarter’s 27.3 percent drop.
Revenue is expected to fall 11.4 percent -- a big improvement from a drop of 14 percent in the second quarter.
“As of right now, the growth rates are improving for earnings and revenues,” said John Butters, director of U.S. earnings for Thomson Reuters.
The financial sector is expected to show the highest growth rate of any S&P 500 sector, followed by consumer discretionaries, while materials should have the lowest earnings growth rate, Thomson Reuters data showed.
Along with Alcoa, other major companies set to report results next week are Costco Wholesale Corp., Family Dollar, Yum! Brands Inc and PepsiCo.
Along with a stronger economy, the falling dollar was also seen as providing a boost to corporate earnings.
Analysts said big technology companies like Microsoft Corp, whose software is used around the globe, stand to gain from the dollar’s weakness.
Editing by Jan Paschal
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