Tuesday, January 12, 2010

Less-Bad Earnings Finally . . . Turn Good

If the analysts are right, over the next few weeks, US corporations will report higher quarterly earnings on a year over year basis or the first time since October of 2007 . The better earnings will largely be driven by the big banks. If you recall, the fourth quarter of 2008 was just a disaster for the big banks, as they were forced to take huge write offs in their mortgage businesses. Even though many big banks are still struggling, some have turned the corner and will show huge gains. Over the last three quarters, S&P 500 earnings have gotten progressively less-bad, with the third quarter being down on a year over year basis by about 10%. And, even though earnings are expected to be higher for the fourth quarter, they will still be nearly 25% below their October 2007 peak. It is clear that even though the analysts' optimism is welcome news, there is still significant slack in corporate America. At present the analysts are predicting that corporate profits for all of 2010 will be approximately 25% higher than 2009. Almost all industry sectors are expected to show earnings increases, with tech and industrial earnings growth leading the way. We will chronicle this earnings season in weekly reports as we have done over the past year. Our belief is that S&P 500 earnings for the fourth quarter will again beat analysts' estimates by a good margin. As we reported in a previous blog, we believe 2010 economic and earnings news will be better than investors are now forecasting. This out performance should continue to lift stock prices, at least through the first six months of the year. Earnings reports will begin in earnest next week. We'll make our first earnings report of the season late next week.