Earnings Climate Changing

If you are long this market, there is good case to be optimistic. About 75% of S&P 500 companies have already reported and the earnings have been better than expected. You could not tell this based on the market action, but the Q1 earnings growth is estimated at a strong 13.80% according to data from Thomson Financial. The earnings growth is below the 20% growth staged between the 2003Q3 and 2004Q2, but nonetheless, the results have been encouraging.

 The strongest estimated year-over-year Q1 earnings growth belongs to the energy sector at 37%, which should not be a surprise given the surging oil prices. If oil prices remain above $70 a barrel, the outlook for energy stocks looks decent, but not at the Q1 pace. Yet, if tensions in Iran mount and the threat of a potential military action rises, we could see a strong upward surge in oil prices towards $100 a barrel, which would obviously drive earnings growth in the energy sector.

 Other strong sectors for the Q1 are estimated to be Industrial at 17%, Technology at 16% and Telecom at 13%. Some of you may be surprised to see the Industrial group, but remember that old economy stocks such as steel, building materials, and machinery drives the economic growth. Technology is showing decent growth at 16%, but the valuation of tech stocks remains excessive.

 Sectors showing the slowest Q1 earnings growth include Consumer Staples at 3%, Consumer Discretionary at 8% and Utilities at 8%.

 So, how does it look going forward? Initially growth in the Q2 was estimated to fall to just under 8%, but the earnings climate has dramatically changed. The Q2 earnings growth for the S&P 500 is estimated to increase 11.3% and then surge to 15.2% for the Q3, which is well above what the earlier consensus pegged.

 Sectors that I continue to like include oil, gold and other metals, and industrial.