Expect More Positive Earnings Surprises

By Bill Stone of PNC Wealth Management

Our Outlook for First-Quarter Earnings We expect the first quarter to provide another positive earnings surprise relative to expectations for the following reasons: First-quarter expectations of 11.9% year over year growth for revenue, excluding financials and utilities, seems beatable, given our estimate that nominal GDP increased roughly 3% year over year in the first quarter. To put it in perspective, fourth-quarter 2009 nominal GDP increased 0.8% year over year, while S&P 500 revenues, excluding financials and utilities, rose 4.5%. Taking a conservative stance, international revenues account for at least one-third of S&P 500 revenues. This benefits U.S. companies because they derive sales from faster growing economies around the globe. Even though the trade-weighted dollar has risen of late, it remains below year-ago levels, so we do not expect currency translation to be a significant detractor, yet. Operating margins for the S&P 500, excluding financials and utilities, are expected to be 7.2% in the first quarter, compared with 7.7% in fourth-quarter 2009. A combination of seasonal factors -- first-quarter margins tend to be higher than fourth-quarter -- and continued cost control should combine to make consensus operating earnings conservative. The combination of our forecast for continued economic growth in the first quarter and our expectations that corporate expenses remain contained leads us to believe that first-quarter earnings expectations again seem reasonable and beatable. Possible Market Reaction We believe the stock market should find support in the fact that corporations are beginning to see the positive effects of the economic rebound in terms of revenue and earnings growth. If the sales recovery continues as we expect, this should help provide the earnings leverage to support a sharp earnings recovery, which would bolster our view that the S&P 500 can produce at least $75 in EPS in 2010, with the risk likely to the upside. Stocks should be buoyed by valuations looking much more reasonable as the higher earnings outlook begins to become tangible. As the stock market has recovered more than 75% from its lows, expectations have risen in sympathy. This leaves open the risk of disappointment and accompanying market losses. In the short term, the market looks overbought and susceptible to a pullback, but we think investors should focus on the big picture that the economy is improving, which should lead to higher earnings and support stocks over the longer term. As we typically do occasionally during most earnings seasons, we'll be updating the progress and our views in response to the results in the coming weeks. PNC Portfolio Positioning The economic outlook should remain a constructive backdrop for the markets. Our view remains that the recovery from the Great Recession of 2008-2009 has begun and should be sustainable. Last week's March jobs report showing that the private sector has finally begun hiring again certainly bolstered our case.   Loading Comments...   1 2 Last » Next â?º

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