Earnings Central To Bullish Case


If it seems like every three months you read another stock-market forecaster describing the coming earnings-reporting season as especially crucial, perhaps it's because such people like to be right once in a while.

The bullish case for U.S. stocks hinges on expectations that corporate America is performing well enough to grow in an adverse environment, that earnings for the S&P 500 Index are at an all-time high and headed higher, and that cash-hoarding U.S. companies will boost dividends, share repurchases, and acquisitions as profit growth continues and animal spirits revive.

The current earnings season, which kicked off Jan. 9 with Alcoa ($9; AA) but really gets in gear the week of Jan. 16 to Jan. 20, seems especially noteworthy for at least three reasons:

Growth is slowing. Per-share profits for the S&P 500 Index are expected to be up 7.8% year-to-year for the December quarter, down from the 15% growth expected at the start of October, according to Thomson Reuters. The ratio of negative-to-positive earnings preannouncements is at three-year highs.

The estimate reductions may have set the stage for a relief rally as results are announced; in recent years stocks have tended to perform better in earnings seasons that followed a rash of preannouncements. But the consensus now calls for year-to-year earnings growth for the S&P 500 of just 5% for the March quarter and 10% for full-year 2012, so another round of estimate cuts would undermine the "growth-at-a-discount" argument for stocks.

Market averages are near key highs. The Dow Theory turned bullish in late December, when both the Dow Industrials and Dow Transports closed above their October highs. The widely followed S&P 500 Index confirmed that move Jan. 10, when it closed above its October high of 1,285.09. Now attention turns to last year's highs of 12,810.54 in the Industrials, 5,618.25 in the Transports, and 1,363.61 in the S&P 500. A rally above those levels would put the averages at the highest levels in more than three years — and ratchet up performance anxiety for portfolio managers still playing defense.

Corporate confidence depends on profits. While dividend growth has accelerated, the percentage of S&P 500 earnings being paid out in dividends is near all-time lows. Corporate cash levels are near all-time highs, and borrowing costs are near historic lows. Yet acquisition activity has been muted. Another quarter or two of profit growth could embolden executives.


The market's reaction to December-quarter results should be watched closely. For now, Our buy lists have 85% to 88% in stocks, with the remainder in a short-term bond fund.

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