IT SHOULD come as no surprise that stocks have sold off into the second quarter reporting season. After all, when it comes to markets it’s often better to travel than arrive. While markets were rallying from March lows, many analysts were lowering expectations for corporate profitability. The sad truth was though, at that stage, most managers were so desperate to jump back into equities they really didn’t care about issues like the bottom line.<br /><br />While the story might have changed, the second quarter earnings season still contains the potential to disappoint. The spread between bottom-line profit and share prices may have come in to more realistic levels, but the quality of earnings is likely to be far from compelling. <br /><br />That’s because, for many firms, much of what is being achieved on the bottom-line is due to cost cutting in the middle of the profit and loss and not strong growth at the top-line. Consequently, the worry must be that these profits might not be repeatable. Hence the underlying problem with the green shoots recovery story: Where is the end consumer? Who is going to buy the products produced by the same firms that are shedding vast numbers of workers (read consumers) in order to protect their bottom line?<br /><br />If this were a normal cycle this wouldn’t be an issue. Profitability always bounces as productivity rises and sales come later. This time, however, it will be a problem due to the combination of the scale of the job losses and the fact consumers are undergoing a painful de-leveraging process that will see savings rates rise and expenditure fall far further. <br /><br />To make matters worse we have yet to get a real sense of just how substantial the job losses will be in the public sector. Here the recession has yet to have any meaningful impact, though this is about to change as governments are forced to cut back to reign in budget deficits. The cuts, when they come, are likely to be substantial and will only make it harder for CEOs and investors alike to find what will become an increasingly rare commodity: real revenue growth.<br /><br />Guy Johnson co-anchors European Closing Bell and Europe Tonight weekdays on CNBC.