Morning MoneyBeat: Putting a Bow on Earnings Season

Morning MoneyBeat is the Journal’s pre-market primer packed with market updates, insights and must-read news links. Send us tips, suggestions and complaints: steven.russolillo@wsj.com

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MARKET SNAP: At 6:00 a.m. ET, S&P 500 futures up 0.3%. 10-Year Treasury yield higher at 2.52%. Nymex up 77 cents at $103.10. Gold 0.1% lower at $1293.30. In Europe, FTSE 100 down 0.2%, DAX up 0.2% and CAC 40 flat. In Asia, Nikkei 225 down 0.2% and Hang Seng up 0.01%.

WATCH FOR:  No major economic data on dap. American Eagle, Booz Allen, Eaton Vance(EV), Hormel Foods(HRL), L Brands(LB), Lowe's(LOW), NetApp, PetSmart(PETM), Renren(RENN), Sina, Target, Tiffany, Trina Solar(TSL) and Williams-Sonoma(WSM) are among companies scheduled to report quarterly results.

THE BREAKFAST BRIEFING

Another earnings season is in the books. The good news: it wasn't nearly as bad as initially feared. The bad: profit growth and forward guidance don’t offer much to celebrate.

Companies have struck a cautious tone on their earnings projections for the current quarter and the rest of the year. With the economy stuck in a slow slog, the Federal Reserve paring back its stimulus and talk of rate increases ramping up, investors say earnings need to improve to justify the stock market’s latest run toward record levels.

Such a pickup may not be in the cards.

Some 473 companies in the S&P 500, or about 95% of the index, have reported quarterly results as of Tuesday morning. First-quarter profits rose just 2.0% from a year ago, according to John Butters, senior earnings analyst at FactSet. That's better than the 1.3% decline analysts predicted heading into earnings season, but it's still well below the previous quarter's 8.5% growth rate.

Many companies blamed the cold, dreary winter weather for lackluster results. U.S. economic growth was barely positive in the first three months of the year, so poor corporate results get a pass. But as the weather improves, the hope is earnings will follow suit. Analysts forecast second-quarter profit growth of 6%, FactSet data show. Those projections could be too optimistic.

About three of every four companies that have given quarterly outlooks so far have predicted results below Wall Street estimates. That level of caution is actually better than the past few quarters, but it's still a historically high figure for negative guidance.

That's making some investors nervous.

Krishna Memani, chief investment officer at Oppenheimer Funds, which oversees about $237 billion, said investors are concerned that, after a weather-induced slowdown in the first quarter, there is still no clear sign the economy has started accelerating in the second quarter.

“We were looking for a recovery in retail sales and the economy, and we’re just not seeing it,” Mr. Memani told the WSJ.

Meanwhile, worries about interest rates are also weighing on the market. Federal Reserve Bank of Philadelphia President Charles Plosser, a noted hawk, said Tuesday that the central bank may have to boost interest rates earlier than anticipated. The Fed has been gradually paring back on its highly stimulative bond-buying program this year, but most expect the Fed to keep short-term interest rates anchored near zero well into 2015.

Those comments helped spark a retreat in the stock market Tuesday. The Dow Jones Industrial Average tumbled 137 points, 0r 0.8%, to 16374, its lowest close since April 25.

To be sure, the blue-chip average still only sits 2% off its all-time high. Volatility remains historically low, deal activity has picked up and few economists are forecasting a recession anytime soon. That backdrop suggests any decline in the stock market will likely be short and shallow.

Trading volume is expected to be light through the remainder of the week ahead of Memorial Day weekend (markets are closed Monday), which could make stocks susceptible to bigger swings.

But from a longer-term perspective, any substantial advance for U.S. stocks beyond these record levels will need to be supported by strong earnings growth. With the Fed pulling back on stimulus and the economy bouncing back from the brutally cold winter, it’s time for companies to step up.

Morning MoneyBeat Daily Factoid: On this day in 1980, the second "Star Wars" movie–"The Empire Strikes Back"–was released.

-By Steven Russolillo; follow him on Twitter @srussolillo.

–Tomi Kilgore contributed to this post.

STOCKS TO WATCH

Target is projected to report first-quarter earnings of 71 cents a share, according to a consensus survey by FactSet. "We remain concerned the departure of Gregg Steinhafel may foreshadow greater than expected difficulties in both markets. While the appointment of a new CEO and a resetting of expectations could prove a positive catalyst, the stock will likely confront further near-term challenges," said Bob Summers at Susquehanna International in a note.

Lowe's is forecast to post first-quarter earnings of 60 cents a share.

Williams-Sonoma is likely to report earnings of 44 cents a share in the first quarter. Analysts at UBS on Tuesday raised the stock's price target to $65 from $63 and maintained its rating at neutral.

MUST READS (LINKS)

Debt Rises in Leveraged Buyouts Despite Warnings: “Regulators have impressed upon banks that they aren’t happy with the amount of loans fueling takeovers by private-equity firms.”

Housing Investors Settle Into a Holding Pattern: “With bargains less plentiful, large housing investors are slowing property purchases and turning their focus to generating steady income from tenants.”

Credit Suisse CEO Nearly Lost Job During Tax Probe: “As a yearslong U.S. tax probe dragged on in recent months, board members at Credit Suisse(CSGN.VX) mulled actions that likely would have cost CEO Brady Dougan his job.”

Ahead of the Tape: With Target, It Helps to Aim Low: “Target’s perverse advantage going into its earnings report is that investors don’t expect much.”

GOP Sees Primaries Taming the Tea Party: “Republican leaders made significant strides in their effort to defang—or at least co-opt—the tea party as an insurgent political force.”

BOE Minutes Indicate Emerging Divisions: ”For some Bank of England officials, the time to raise interest rates in the U.K. is getting closer, as minutes of the central bank’s May meeting record ‘a variety of views on the appropriate path of monetary policy.’”

Demand High as Fannie Mae(FNMA) Sets Price Range for Risky Securities: “Investors are clamoring to buy mortgage giant Fannie Mae’s $1.6 billion offering of derivative debt securities tied to the value of some of the riskiest mortgages it guarantees.”

Heard on the Street: Deal-Making Patience May Prove Dish’s Virtue: “AT&T’s offer to buy DirecTV(DTV) seems to narrow options for Dish. But Chairman Charlie Ergen still has cards to play.”

Copper Mining Squeezed by Tight Water Supply: “Freeport-McMoRan, one of the world’s top copper miners, has invested heavily to secure access to water as copper prices have fallen 32% from highs in 2011.”

Workers Try a New Tactic in Minimum-Wage Fight: “Stymied by Congress on their minimum-wage push, low-wage workers and even Obama administration officials are pleading for U.S. companies from McDonald's(MCD) to Wal-Mart(WMT) to raise wages voluntarily.”

Heard on the Street: Microsoft's(MSFT) Tablet Only Scratches the Surface: “Microsoft’s latest Surface tablet goes in an unexpected direction, but still isn’t enough to assure the tech giant a leading mobile-computing role.”