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By Jeremy Glaser and Heather Brilliant, CFA | 07-01-2013 02:00 PM

What We Can Expect From Second-Quarter Earnings

Morningstar's Heather Brilliant says investors could see a lot of market volatility this upcoming earnings season, but that could make for tremendous buying opportunities of quality names.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. As we get ready for second-quarter earnings, I’m sitting down with Heather Brilliant, our global director of equity and credit research, to see what he expectations are for companies’ earnings.

Heather, thanks for joining me.

Heather Brilliant: Thanks for having me, Jeremy.

Glaser: Let’s take a quick look back at the first quarter. What did we generally think that earnings looks like then, and do you expect that kind of trend to continue as we get second-quarter results soon?

Brilliant: I think the first quarter was generally in line with expectations. There weren’t a lot of huge surprises one way or another. We saw a lot of our fair value estimates start to go up after the first-quarter earnings, partially as we really looked at the cash flows the businesses have been generating and how we see things developing over the next year or so. So on balance, we saw the market go up during the second quarter, but we also saw companies, as they are reporting first-quarter results, see their fair values increase on balance.

Glaser: So let’s take a look at some of the themes you’re going to be keeping an eye on in the second quarter.  A big one has to be profitability. Profit margins were very high for a long time. Have you started to see those come in? Do you expect to see lower reported profitability in the quarter?

Brilliant: I think that it’s a reasonable expectation that record-high profitability cannot continue indefinitely. We’re a little bit less concerned with businesses that are exposed to the United States and a little bit more concerned with businesses that still have a lot of exposure to Europe, and especially to China. We’ve been talking about China seeing industrial production come down, and we started to really see that play out. We think companies that are more exposed to that will certainly be affected.

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