Second-Quarter Profits: Grief or Relief?

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Wall Street keeps expecting the big financial losses to stop or at least slow, but Reynolds believes it could take until 2009 for industry players to write off all the losses due to credit troubles this year. "These things always tend to drag out," he says.

Another problem area is the consumer discretionary sector, where earnings are expected to fall 15%. American consumers clearly are cutting back their spending amid record gas prices.

A Recovery for Builders?

But even in this sector are glimmers of hope. Much of the drop from last year's profits is expected to come from automakers. The slow housing market is still taking a toll on homebuilders, but their earnings are expected to recover somewhat from last year, which was disastrous for the residential construction industry.

If you can ignore financials and consumer discretionary names—a big if—the mood brightens quite a bit. "It's those sectors that are dragging everything down," says William Rutherford, president of Rutherford Investment Management.

Many companies are lucky the U.S. dollar is weak, because it gives a boost to earnings reported from overseas, Dropsey says. Oracle says 51% of its sales come from Asia, Europe, the Middle East, and Africa.

The best sector by far is expected to be energy, where high oil prices should help boost sector profits 23%, Thomson Reuters says.

Information technology companies are expected to increase their profits 16%. Other sectors are also expecting modestly positive quarter, a sign that some parts of the U.S. economy continue to hold their own.

One worry remains record fuel prices. High energy costs don't just dampen consumer spending; they can also hurt a corporation's bottom line. Such outfits as FedEx, United Parcel Service (UPS), and Carnival (CCL) recently warned that fuel costs could be a drag on profits later this year.

The financial crisis, particularly turbulence in credit markets, will hog the spotlight during second-quarter earnings season, according to Reynolds.

Still, corporate profits outside the financial sector could be a good test of the overall strength of the broader U.S. economy. Investors will be watching closely as traditional early-bird Alcoa (AA) kicks second-quarter earnings season into gear on July 8.

Steverman is a reporter for BusinessWeek's Investing channel.