Market watchers have something new, brutal to worry about

- Matt Krantz @mattkrantz USA TODAY

The Brexit scare may have passed, but there’s a potentiall­y more serious thing to worry about: a big drop in corporate profits during the just-ended second quarter.

Some of the profit drops are likely to be brutal. Seven stocks in the Standard & Poor’s 500, including mostly energy companies such as Anadarko Petroleum, EQT and ConocoPhil­lips are likely to see their earnings fall by 500% or more, according to a USA TODAY analysis of data from S&P Global Market Intelligen­ce. That’s just the beginning.

Corporate bottom lines look pretty ugly for most companies. Overall, S&P 500 earnings are predicted to drop 5% during the second quarter, making it the fourth-straight period of lower profit. The expected secondquar­ter profit drop is slightly better than the 6.8% decline in S&P 500 earnings in the first quarter, but it’s much worse than the 4.2% drop in the fourth quarter of last year and 1.4% decline in the third quarter of 2015.

It shouldn’t be a surprise to most investors that second-quarter earnings could be lousy, says Doug Sandler, equity strategist at Riverfront Investment Group. The S&P 500 is up just 2.8% this year as investors have steadily lowered profit expectatio­ns for the quarter. “The good news is you’re coming in with low expectatio­ns,” Sandler says.

Not surprising­ly, the energy sector’s profits continue to implode. Anadarko, an oil and natural gas exploratio­n company, is likely to lose 88 cents a share during the quarter, a brutal decline from the penny a share it earned in the same period a year ago. Oil prices, even after a 30% rally this year, are still 20% lower than they were a year ago, which puts a big crimp on the sector’s bottom line. It’s not just Anadarko: 18 of the 20 largest expected drops in quarterly profit are in energy companies. Overall, energy sector profits are likely to fall 80% from year-ago levels, including the 4,311% drop in expected profit at EQT and more than 1,000% drop expected at ConocoPhil­lips.

It would be a mistake to assume the profit recession is a problem just for energy investors. Five of the 10 sectors, including consumer staples, financials, informatio­n technology, materials and telecom, will join energy in the profit decline if forecaster­s are right.

Outside the energy sector, toymaker Mattel is likely to post the largest decline in profit, seeing its bottom line shrivel up from a gain of a penny a share to a loss of 5 cents a share. The company is reeling from losing the Walt Disney licensing deal to make Disney Princess dolls.

If there’s a bright side to all this, it’s that investors seem to think things are bottoming for many companies. Shares of the 10 companies with the largest expected second-quarter drop have actually seen their shares rise nearly 33% this year on average. Anadarko’s shares are up 13%; Range Resources is up 81%. Energy stocks were among the biggest winners in the second quarter.

“People are writing off a lot of the earnings weakness,” Sandler says.

“The good news is you’re coming in with low expectatio­ns.” Doug Sandler, equity strategist at Riverfront Investment Group

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