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Earnings to test Wall St’s bet on recovery (Reuters)
NEW YORK (Reuters) –
Wall Street's confidence in the nascent U.S. economic recovery is about to be tested as fourth-quarter earnings season gets under way next week.
The horrid fourth quarter of 2008 means year-over-year comparisons will be stellar for most companies. But investors will scrutinize whether outlooks point to sustainable growth.
The last two periods of earnings were driven by cost-cutting, but analysts expect to see stronger revenues, or top-line growth. They are also eager for 2010 prospects to validate the bullishness that has propelled the
(.SPX) and the Dow Jones industrial average (.DJI) to 15-month highs and the
(.IXIC) to 16-month highs.
spending programs,” said Frederic Dickson, market strategist at D.A. Davidson & Co in
Lake Oswego, Oregon
. “Investment spending was cut to the bone in 2009.”
.N) is set to post
on Monday, marking the unofficial kickoff to earnings announcements, though several companies have reported this week.
are expected to post earnings of $15.81 a share for the fourth quarter after losing money for the same period a year ago.
ECONOMY ON THE MEND?
A positive fourth quarter would mark the first quarter that S&P 500 company earnings grew year-over-year since the second quarter of 2007. The 2008 fourth quarter was the worst earnings quarter in the history of the
.
Sectors set to lead are materials companies, seen posting a 161.2 percent rise in earnings; consumer discretionaries, seen posting 113.5 percent in earnings growth; telecoms, with a 51.6 percent run-up in earnings and technology, seen posting a 30.2 percent rise in
.
But in order for stocks to sustain momentum, investors would have to see signs that reinforce data suggesting the economy is on the mend, analysts said.
On Friday, all eyes will be on the government's December non-farm payrolls report.
“Investors are looking for more top line (growth), even more so than the last quarter, that we start to see sequential improvement in topline growth either during the quarter or companies project it out into 2010,” said Owen Fitzpatrick, head of
's U.S. equity group in New York.
.O), which reported a higher-than-expected quarterly profit on Wednesday and forecast full-year results above
.
On a conference call, the company said it was “cautiously optimistic” about the rest of the year. Homebuilder
.N), which reported results on Thursday, said it was “positioned” to return to profitability in 2010.
The extensive cost-cutting last year should make income statements “more taut in that a minor boost to the top line trickles down much faster to the bottom line,” said John Lynch, managing director and chief market analyst at Charlotte, North Carolina-based
.
Corporate outlooks, he said, will be more important. So far, the ratio of negative fourth-quarter earnings outlooks to positive is about the same as the third quarter, according to Reuters data. The ratio for both quarters is 1.5, though there have been more announcements in this quarter overall.
Investors will also be on the lookout for anything said about likely demand and when companies plan to resume capital investment to rebuild inventories after the worst recession since the 1930s.
They will also be alert for any comment about curbing layoffs.
More signs of renewed vigor in profitability, analysts say, should provide further fuel for equities and possibly lift the
toward 1,200. The benchmark index has risen 68.6 percent since U.S. stocks hit bottom in early March.
The current expectation for 2010 earnings per share for the S&P is $77.59, according to Thomson Reuters data. At an average multiple of 15 times earnings, that would put the S&P at about 1,163, so if the pace of growth improves, it would justify a higher level for the stock market.
Per-share earnings of $77.59 would represent earnings growth of 30 percent in 2010; the estimate for 2011 is for growth of 21.6 percent. But should analysts start to see those forecasts as too lofty based on poor company outlooks, the market will feel it.
“I just think expectations are too high for 2010,” said Lynch, whose firm is an
.N) and has more than $150 billion under management. “I don't see the leadership coming from the consumer, financials, housing and from leverage which enabled us to peak in profitability at the last cycle.”